von Neumann-Morgenstern utility
Von Neumann-Morgenstern utility is a concept in decision theory that helps explain how people make choices under uncertainty. It assumes that individuals assign a numeric value, or "utility," to different outcomes based on their preferences and risk tolerance. This utility allows them to compare and rank these outcomes, guiding their decisions. For example, if someone prefers a guaranteed $50 over a 50% chance of $100, their utility function reflects this preference. Overall, it provides a mathematical framework to understand how people evaluate risks and rewards when making decisions in uncertain situations.
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The von Neumann-Morgenstern utility theory is a framework used in economics and game theory to represent an individual’s preferences under uncertainty. It assigns a numerical value, called utility, to different outcomes based on how much value or satisfaction an individual expects from them. This allows people to make decisions that maximize their expected utility, helping them choose between risky or uncertain options. Essentially, it combines preference ranking with probabilities, enabling rational decision-making in complex situations where the outcomes are not guaranteed.