Uncertainty effect

The uncertainty effect, also known as direct risk aversion, is a phenomenon in economics and psychology in which individuals value a risky prospect (such as a lottery with known probabilities) less than its worst possible outcome.

In the original study by Uri Gneezy, John A. List, and George Wu in 2006, participants were willing to pay $38 for a $50 gift card, but only $28 for a lottery ticket that would yield either a $50 or $100 gift card with equal probability.

This effect is considered to be a violation of "internality" (i.e., the proposition that the value of a risky prospect must lie somewhere between the value of that prospect’s best and worst possible realizations) which is central to prospect theory, expected utility theory, and other models of risky choice. Additionally, it has been proposed as an explanation for a host of naturalistic behaviors which cannot be explained by dominant models of risky choice, such as the popularity of insurance/extended warranties for consumer products.