Expected-Utility Axioms (Von Neumann & Morgenstern,1947)
Connectedness x>=y or y>=x
If x>=y and y>=z, then x>=z
Substitution Axiom or Sure-thing principle If x>=y, then (x,p,z) >= (y,p,z) for all p and z
If you “buy into” all axioms, then you will choose X over Y
- if and only if EU(X) > EU(Y),
where EU(X) = Sum over all i {u(xi) p(x i)} and EU(Y) = Sum over all i {u(yi) p(y i)}