von Neumann-Morgenstern theory

The von Neumann-Morgenstern utility function, introduced in Theory of Games and Economic Behavior (1944), extends consumer preference theory to include behavior toward risk. It's based on the expected utility hypothesis, which states that when faced with uncertain outcomes, individuals make choices that maximize the expected value of their utility (satisfaction). This expected value is calculated by summing the products of each outcome's utility and its probability.123

This theory can explain risk-averse, risk-neutral, and risk-loving behaviors. For example, a risk-averse individual might prefer a guaranteed payoff over a gamble with a higher expected monetary value due to a greater disutility of potential loss. While widely applied in economics and business, critics note that human cognitive limitations may make precise expected utility calculations impractical, and some question its adequacy for ethical decision-making.123