Neumann-Morgenstern Utility

Neumann-Morgenstern Utility is a way to measure how people value risky decisions. Instead of assigning fixed values to outcomes, it assigns a utility function that reflects a person's attitudes toward risk, capturing their preferences over uncertain options. This helps to explain why individuals might prefer a guaranteed outcome over a gamble with the same average value, or vice versa. The concept assumes people behave consistently according to their preferences and that their choices under risk can be predicted using this utility function, which transforms actual outcomes into a scale that captures their subjective satisfaction or desirability.