von Neumann-Morgenstern Utility Theory

The von Neumann-Morgenstern Utility Theory is a framework for understanding how people make choices under uncertainty. It suggests that individuals have preferences for different outcomes, and they can assign a numerical value, or "utility," to these outcomes based on their personal satisfaction or happiness. When faced with risky decisions, people aim to maximize their expected utility, considering both the likelihood of various outcomes and their associated utilities. This theory helps explain decision-making in areas like economics, finance, and psychology by illustrating how people evaluate risks and rewards in uncertain situations.