The Von Neumann-Morgenstern Utility Theorem

The Von Neumann-Morgenstern Utility Theorem states that if individuals make choices consistently and logically under uncertain conditions—preferring outcomes that balance risks and rewards—they behave as if they are maximizing a special kind of personal value, called utility. This utility assigns numbers to different outcomes so that more preferred results have higher numbers, allowing their preferences to be represented mathematically. In essence, the theorem shows that rational decision-making under risk can be modeled using a utility function, helping to predict and understand how people make choices involving uncertainty.