Von Neumann-Morgenstern Theory

The Von Neumann-Morgenstern theory is a mathematical framework used to analyze decision-making under risk. It assumes individuals evaluate uncertain options based on their potential outcomes and assign probabilities to each. The theory introduces a way to rank these options through a "utility" scale, where preferences are consistent and can be represented by a mathematical function. This allows for understanding how people make choices when faced with risky situations, ensuring that their preferences follow rational principles like transitivity and independence, ultimately helping predict their decision patterns in uncertain environments.