Von Neumann-Morgenstern utility function

The Von Neumann-Morgenstern utility function is a mathematical way to represent how people make choices involving risk or uncertain outcomes. It assigns a value (utility) to different possible results, reflecting their preferences and attitudes toward risk—whether they prefer sure things or gamble for bigger wins. This approach allows economists and decision-makers to analyze choices logically, assuming individuals aim to maximize their overall expected utility rather than just focus on monetary gains. It provides a consistent framework to understand decision-making under uncertain conditions, balancing risk and reward to model rational behavior.