The Expected Utility Theory and Measurement Theory of von Neumann and Morgenstern, 1944–1947

Author:

Moscati Ivan

Abstract

Chapter 9 discusses the axiomatic version of expected utility theory (EUT), a theory of decision-making under risk, put forward by John von Neumann and Oskar Morgenstern in their book Theory of Games and Economic Behavior (1944). EUT was a changing factor in the history of utility measurement. In fact, while discussions of the measurability of utility before 1944 focused on the utility used to analyze decision-making between risk-free alternatives, after that year, discussions centered on the utility used to analyze decision-making between risky alternatives. In Theory of Games, the nature of the cardinal utility function u featured in von Neumann and Morgenstern’s EUT, and its relationship with the riskless utility function U of previous utility analysis remained ambiguous. Von Neumann and Morgenstern also put forward an axiomatic theory of measurement, which presents some similarities with Stanley Smith Stevens’s measurement theory but had no immediate impact on utility analysis.

Publisher

Oxford University Press

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