Von-Neumann-Morgenstern Utility Theorem

Utility functions form an essential part of game theory and economics. In order to guarantee the existence of utility functions most of the time sufficient properties are assumed in an axiomatic manner. One famous and very common set of such assumptions is that of expected utility theory. Here, the rationality, continuity, and independence of preferences is assumed. The von-Neumann-Morgenstern Utility theorem shows that these assumptions are necessary and sufficient for an expected utility function to exists. This theorem was proven by Neumann and Morgenstern in “Theory of Games and Economic Behavior” which is regarded as one of the most influential works in game theory. The formalization includes formal definitions of the underlying concepts including continuity and independence of preferences.