The Von Neumann-Morgenstern theory and rational choice

Abstract

[en] Expected Utility Theory (EUT) is an axiomatic theory of choice under risk that has held a central role in economic theory since the 1940s. Throughout this work we will give a thorough description of the von Neumann-Morgenstern theory, which is the cornerstone of EUT and Games Theory. Using the theory and its axiomatisation, we will review its main drawbacks in order to give a proper model of Rational Choice. Furthermore, we will briefly introduce Risk Management, which is a crucial process used to make investment decisions. The process consists in identifying and analysing the amount of risk involved in an investment, and either accepting that risk or mitigating it.