In 1961, Daniel Ellsberg1 placed before test subjects two urns: one with 50 red and 50 black balls, another with 100 balls of unknown distribution. Participants consistently preferred betting on the urn with known odds—even when ambiguous alternatives might offer better payouts.
The Trump administration's "reciprocal tariff" doctrine has unleashed a peculiar form of market anxiety. Not because economic disaster is certain—but because outcomes have become fundamentally unknowable.
This is no accident. The negotiation playbook that made Trump famous deliberately manufactures uncertainty to unsettle counterparties. Now, with different political constraints in his second term, these opening salvos may become sustained policy, fundamentally reorienting global supply chains.
Markets aren't just pricing a different economic reality; they're pricing investors’ cognitive discomfort with ambiguity itself.
The parallel shift on NATO and Ukraine amplifies this effect—introducing unprecedented questions about America's stabilizing role in global markets and trade. As Europe contemplates both higher defense spending and economic diversification, the dollar's hegemony faces its first serious stress test in decades.
The result? Market participants flee not from calculated risk, but from the psychological burden of navigating without historical precedent.
This is precisely where investors can be most vulnerable. Our industry's standardized risk models excel at quantifying known probabilities—but may falter before Ellsberg's second urn.
The danger isn't miscalculating risks; it's misclassifying uncertainty as risk. This habit can create significant subliminal tails in the distribution of outcomes, pulling estimates of central tendency and portfolio positioning out of the range required to meet client objectives.
We risk optimizing portfolios against imagined precision rather than embracing strategic ambiguity. US equities, international allocations, fixed income and alternatives all may require recalibration—not for disaster scenarios, but for ambiguity-adjusted returns.
Can your portfolio survive an extended regime of strategic ambiguity?
Consider a world where:
- Supply chains reorient rather than collapse.
- Inflation runs as much as 1.5% above the Federal Reserve's target while the dollar weakens 10%.
- European defense priorities create new sectoral winners.
- Corporate margins compress before automation accelerates.
- Trading partners retaliate selectively, not comprehensively.
The greatest opportunity of 2025 may lie precisely at the point where others confuse uncertainty with risk.
Important Disclosures & Definitions
1 Ellsberg, D. (November 1, 1961). Risk, Ambiguity, and the Savage Axioms. The Quarterly Journal of Economics, 75(4), 643-669. https://doi.org/10.2307/1884324.
AAI000921 04/08/2026