Neuman and Morgenstern

Journal of Risk and Uncertainty, 2: t27-t58 (t989)
1988 Kluwer Academic Publishers

Retrospective on the Utility Theory of
von Neumann and Morgenstem
PETER C. FISHBURN*
AT&T Bell Laboratories
Key words: von Neumann-Morgenstern utility, ordinal utility, cardinal utility
Abstract
This article offers an exegesis ofthe passages in von Neumann and Morgenstern (1944,1947,1953) that
discuss their conception of utility. It is occasioned by two factors. First, as we approach the semicenten-
nial of the publication of Theory of Games and Economic Behavior, its immense impact on economic
thought in the intervening years encourages serious reflection on its authors' ideas. Second, misleading
statements about the theory continue to appear. The article will have accomplished its purpose if it
helps others appreciate the genius and spirit ofthe theory of utility fashioned by John von Neumann
and Oskar Morgenstern.
Utility is one ofthe strangest words in the annals of economics and decision theory.
Early appearances occur in the evaluation of risky monetary ventures by Gabriel
Cramer (1728) and Daniel Bernoulli (1738), and in Jeremy Bentham's (1823)
qualitative systemization of value in public and private economics:
.. .in practice, people with common sense evaluate money in proportion to the
utility they can obtain from it (Cramer, 1728; see Bernoulli, 1954, p. 33);
. . . the value of an item must not be based on its price, but rather on the utility it
yields. (Bernoulli, 1954, p. 24);
By utility is meant that property in any object whereby it tends to produce
benefit, advantage, pleasure, good, or happines . . . or . . . to prevent the happen-
ing of mischief, pain, evil, or unhappiness . . . (Bentham, 1823; see Page, 1968,
pp. 3-4).
Its subsequent appearance by many names in nineteenth-century consumer
economics led Irving Fisher (1918) to lament that the concept called ftnal degree of
utility (Jevons), effective utility, specific utility, and marginal efficiency (J. B. Clark),
marginal utility and marginal desirability (Marshall, Side, et al.), Grenznutzen (the
Austrians), Werth der letzten Atome (Gossen), rarete (Walras), and ophelimite
(Pareto) "seems still in need of really satisfactory terms by which to express it"
(Fisher, 1918, p. 335). Fisher himself used desirability rather than utility in most of
*The author wishes to thank Princeton University Press for permission to quote extensively from
Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstem.
128 PETER FISHBURN
his books, but was not entirely happy with its ethical connotation, and suggested
wantability to his colleagues in economics for their consideration. Economists
have also had to contend with measurable utility as well as ordinal utility and car-
dinal utility (Hicks and Allen, 1934), and not a little confusion was sown when von
Neumann and Morgenstern (1944) endowed utility with an entirely new meaning.
It is true that a similar meaning was introduced earlier by Ramsey (1931), but wish-
ing to dissociate his theory from the then-popular notion of diminishing marginal
utility, Ramsey spoke about values and measuring values numerically. Moreover, his
work went virtually unnoticed until its importance was publicized by Bruno de
Finetti, Kenneth Arrow, and Leonard J. Savage around 1950. Mindful of its check-
ered history, Fishburn (1964) avoided utility in favor of relative value, but has long
since recanted (Fishburn, 1970).
The hornets' nest stirred up by von Neumann and Morgenstern's new use of
utility has, for the most part, been quiescent since the 1950s, thanks to a number of
careful expositions of their theory. These include Marschak (1950), Weldon (1950),
Arrow (1951), Strotz (1953), Savage (1954), Ellsberg (1954), Luce and Raiffa (1957)
and Baumol (1958): all offer valuable insights and interpretations. My own
favorite, because of its clarity and incisiveness, is Ellsberg (1954).
These and later expositors have told us a great deal about what von Neumann
and Morgenstern meant by utility, but apart from a few choice quotes they have
revealed very little about what von Neumann and Morgenstern said about utility.
For that it is necessary to return to the source.
I do this for two reasons. First, nearly 50 years have passed since von Neumann
and Morgenstern wrote the Theory of Games and Economic Behavior: it has been a
classic with enormous influence for most of those years, and it seems none too
soon to submit its passages on utility to exegesis. In doing this I draw not only on
the state of utility theory, preference theory, axiomatics, and measurement theory
when they wrote their book during the war years of 1940-1942, but also supple-
ment the discussion with developments in these areas since then. This allows a
larger historical frame for their work and reveals its anticipation of later
contributions.
The second reason is the disturbing fact that inaccuracies and misleading
statements about the intentions and theory of von Neumann and Morgenstern
utility continue to find their way into print. I hope that this article will help others
appreciate just what it was that von Neumann and Morgenstern said about and
meant by utility.
The next two sections prepare for the exegesis proper. Section 1 provides a brief
overview of usages of utility prior to 1940 and mentions a few things that have hap-
pened since then. Section 2 summarizes salient points about von Neumann-
Morgenstern utility noted by expositors cited earlier and supported by the authors'
own words. Section 2 also illustrates misunderstandings of their contribution that
have arisen over the years.
Section 3 begins the exegesis by giving von Neumann and Morgenstern the op-
portunity to look back on their work 10 years later in their Preface to Third Edition
(1953). It also quotes from an early paragraph in their section 2.1 on rational
UTILITY THEORY OF VON NEUMANN AND MORGENSTERN 129
behavior that places their treatment of utility within the larger concern of the
theory of games. All quotes from their work are from the 1953 edition.
Sections 4 through 12 contain extensive quotes from their sections 3.1 through
3.7, interspersed with commentary. All notation and emphases in the quotations
are their own, and for expositional reasons their footnotes are placed in brackets
immediately following the markers. A few footnotes that add little have been
removed.
Section 13 concludes the essay with a postscript.
1. Overview of utility
The history of utility through the early part of this century is covered by the peer-
less review articles by Stigler (1950), the book by Kauder (1965) on the history of
marginal utility, and the collection of readings compiled by Page (1968). A few
highlights from this early period are noted along with more recent developments.
We first define ordinal and cardinal utility, terms introduced by Hicks and Allen
(1934) a few years before von Neumann and Morgenstern began their book, that
provide connecting threads for our discussion. Let > be an is preferred to relation
between elements in a setX We say that a real-valued function w onZis an ordinal
utility function if
for all X, y e X,x > y <^ u{x) > u{y}. (1)
Necessary and sufficient conditions for the ordinal utility representation (1),
which consist of an ordering axiom for > on X and an order-denseness condition
(Cantor, 1895) for > when X is uncountably infinite, are discussed in Fisburn
(1970) and Krantz et al. (1971). Because v on X satisfies (1) in place of u if and
only if
for all X, y e X, v{x) > v{y) <=> u{x) > u{y), (2)
an ordinal utility function is said to be unique up to an order-preserving transforma-
tion or a (positive, or increasing) monotone transformation.
If, in addition to (1), w is restricted by other properties that imply that v also satis-
fies (1) and those other properties if, and only if, there are numbers a> 0 and b such
that
for all X G X, v{x) = auix) + b, (3)
then u is referred to as a cardinal utility function and is said to be unique up to a posi-
tive (or order-preserving) linear transformation, or to be unique except for its origin
and scale unit. The other properties that convert an ordinal u into a cardinal u may
or may not have anything to do with psychological notions of measurable
utility.
130 PETER FISHBURN
For Bernoulli (1738), utility connoted a numerical measure of a person's subjec-
tive value of wealth that is independent ofany consideration of probability or risk.
He suggested that utility of wealth ordinarily increases at a decreasing rate (known
later as the principle of diminishing marginal utility of wealth) and, more
specifically, that the utility added by the next increment of wealth is inversely pro-
portional to the amount of wealth already on hand. This implies that M is a
logarithmic function of wealth, a form that reappears with elaborations in the
theory of Allais (1979/1952, 1979).
Bernoulli assumed also that the relative desirabilities of risky ventures or
probability distributions p, q,... on levels of wealth were refiected by their ex-
pected utilities S p{x)u(x), 2 q(x)u(x),... of probability-weighted riskless utilities.
We know (e.g., Fishburn, 1988a, p. 5) that this other property of invariance ofthe
order of expected utilities implies in the presence of (1) that is a cardinal utility
function. Moreover, this is true quite apart from any specific form adopted for u,
such as the logarithmic form, and apart from any psychological presumptions
about the nature of utility.
For European economists in the second half of the nineteenth century (Gossen,
Jevons, Menger, Walras, Marshall), utility continued to be viewed as a riskless
measure of subjective value of wealth or of various amounts of goods that one
might purchase. It was predominantly thought of "as a psychological entity
measurable in its own right" (Strotz, 1953, p. 84), but the extent of its measurability
was actively debated. One might ask whether utility has a natural zero point,
whether it is uniquely determined up to the choice of origin and scale unit, or
whether it is merely ordinal.
One popular form adopted for the utility of a vector (xi, ^^2 i^J ofquantities of
n goods was the additive decomposition
H( XI , X2, . . .,X) = M, (X| ) -I- U2iX2) + . . . + M(X), ( 4)
in which M, is a utility function for good /. This gives another special property for u
which, in conjunction with (1) and some technical conditions (Debreu, 1960;
Fishburn, 1970; Krantz et al., 1971), implies that u is a cardinal utility function.
But, as before with l!,p(x)u(x), the implication of uniqueness up to a positive linear
transformation is forced by (4) and not by whether utility is measurable in some
internal introspective sense.
The position that utility is merely ordinal, without special forms that constrain it
to be cardinal, and without assumptions about human psychology that render it
measurable regardless of such special forms, gained currency as writers like
Edgeworth (1881), Fisher (1892), Pareto (1906), Johnson (1913) and Slutsky (1915)
showed that important results in consumer economics held on the basis of (1)
alone. This provided economists with a welcomed respite from the baggage of
measurability and led to the development of indifference-map analysis. We say
that vectors of goods x andy are indifferent and write x~y if neither x>>' nory>x.
When (1) holds, we have
x~y <=> u{x) = u(j>) (5)
so that ~ partitions X into indifference classes, with the same utility for all vectors
within a given class. Then (1) orders the indifference classes on a greater-than
utility basis. Each indifference class might be referred to as an isoutility locus,
imagined as a smooth (n - l)-dimensional surface in n-dimensional space, and
the ordered collection of all such loci is said to be an indifference map. The in-
dividual isoutility surfaces in the map are tightly packed to cover the whole of X,
and no two of them ever touch or cross.
Although Pareto sided with the ordinalists, he also noted that if, in addition to
(1), it were possible to compare preference differences, with u preserving the order of
those comparisons, then u would have the characteristics of a cardinal utility func-
tion. GrantingX > y and z > w, let {x, y) > (z, vv) signify that the difference in pref-
erence between x and y exceeds the difference in preference between z and w.
If we require
{x, y) > (z, w) u{x) - u(y) > u{z) - u{w) (6)
for positive differences, and assume a few other technical conditions (Fishburn,
1970, chapter 6), then u is unique up to a positive linear transformation. This third
way of inducing cardinal utility is more evocative of the classical notion of
measurability than the two mentioned earlier. Note also that Bernoulli's analysis
of riskless utility increments that led to his logarithmic form for the utility of
wealth is a difference analysis.
Pareto's approach to cardinal utility through comparable preference differences
was later axiomatized by Frisch (1926), Lange (1934), and Alt (1936). Along with
Ramsey (1931), these articles helped to introduce the axiomatic method into utility
theory. Although their impact was limited by the continuing popularity ofthe or-
dinal position, they appeared to have implanted a strong association between car-
dinal utility and comparable preference differences in the minds of many
economists, if in fact this had not already been done by the likes of Jevons (1871)
and Marshall (1890) in the preceding century.
When von Neumann and Morgenstern entered the scene a few years later, they
tried to divorce their approach from this association. Their success in this en-
deavor will be discussed shortly. We shall also comment on a few of their ax-
iomatic peculiarities before we consider their own words. First, however, we recall
a typical present-day rendition of their theory.
Difficulties and obscurities in von Neumann and Morgenstern's own presenta-
tion led a number of people, including Marschak (1950), Friedman and Savage
(1952), Samuelson (1966/1952), Herstein and Milnor (1953), Cramer (1956), Bau-
mol (1958), and Jensen (1967a), to formulate alternative axiomatizations of ex-
pected utility that are more or less equivalent to the von Neumann-Morgenstern
original. My favorite is Jensen's, which I follow here.
Let X be a nonempty set and let P be a convex set of probability distributions on
132
PETER FISHBURN
X, SO Xp + {1- X)q is inPwhen/?, q G Pand 0 <>.< 1. We can view A./7 + (1 - X)q as
a probability mixture of/? and ^ with weights X and (1 - X), respectively. We apply
> to P, and say that it is a weak order if it is asymmetric \p > q => not {q > p)] and
both > and ~, defined as p~q if neither/? > q norq >/?, are transitive [{p > q, q >
r) =>/? > r; (p~q, q~r) =>/?-/]. Jensen's axioms are these: For all/?, 9, r Pand all 0
> 1
1 (order): > on P is a weak order;
2 (independence): p > q ^ Ip + (I - X)r > hj + {I - X)r;
3 (continuity): /? > ^ > r => a/? + (1 - a)r > ^ > P/? + (1 - ^)r for some a and P
.strictly between 0 and 1.
These axioms say that preferences are nicely ordered, that similar convex com-
binations with a third distribution {r in 2) preserve preference, and that a distribu-
tion between two others in preference {q in 3) is also between nontrivial convex
combinations of those two.
The crux ofthe von Neumann-Morgenstern utility theorem is this: Given > on
convex P, axioms 1, 2 and 3 hold if and only if there is a real-valued function u on
P such that, for all p, q E. P and all 0 < A <1,
p > q <^ u(p) > u{q), (1*)
u{-kp + (1 - X)q) = Xu{p) + (1 - X)u{q), (7)
and these conditions on u imply that it is unique up to a positive linear transfor-
mation. Property (7) is referred to as linearity, and it is this property that leads to
the expected utility form for u(p). In particular, if P contains every finite-support
distributioh onZand we defines onZby(jc) = (/?) when/?(x) = 1, then a simple
induction with (7) shows that
"(p) = 2J ' ( - ^) " ( ^) for every finite-support p G P.
Extensions of this form to u(p) = j u{x)dp{x) for other types of probability dis-
tributions are discussed by Blackwell and Girshick (1954), Arrow (1958), Jensen
(1967a), and Fishburn (1970,1982) among others. Such extensions, which were not
discussed by von Neumann and Morgenstern, require additional axioms.
One final remark may be helpful before we proceed. The preceding rendition of
the von Neumann-Morgenstern theory, as well as other recent contributions cited
earlier, lies within the broader subject ofthe representational theory of measurement.
This theory is generally interested in mappings from a qualitative relational struc-
ture into a quantitative structure and with axioms for the qualitative structure that
imply the mappings. Examples of qualitative structures mentioned earlier are {X,
>), {X, >, ) and (P, >); associated quantitative structures are identified in the rep-
resentations of (1), (1) and (6), and (1*) and (7), respectively. Good introductions to
the representational theory are given in the books by Krantz et al. (1971) and
Roberts (1979).
The modern representational theory of measurement is very much concerned
with the uniqueness properties of representing functions or, as is sometimes said,
with scales of measurement, a topic that has traces in Felix Klein's (1872) program
for classifying geometric structures by their automorphism groups. The definitions
of ordinal utility, based on monotone transformations, and cardinal utility, based
on linear transformations, are simple but important examples ofthe uniqueness
theme. Additional information and references to recent developments are avail-
able in the preceding books and the excellent survey article by Luce and
Narens (1987).
2. Preliminaries and interpretations
The later axiomatizations of linear (expected) utility given by Jensen (1967a) and
others tend to look quite different than the von Neumann-Morgenstern original.
Some ofthe differences are cosmetic, but a few are substantive. They will be ad-
dressed in this section after we review other issues that deserve clarification.
2.1. Comparable preference differences
The most enduring interpretational problem ofthe von Neumann-Morgenstern
theory has been the extent to which it embodies a notion of comparable preference
differences either between pairs of outcomes or between pairs of probability dis-
tributions on outcomes. For outcomes themselves we have in mind the riskless in-
tensity view of measurable utility adopted by Bernoulli (1738) and many nine-
teenth-century economists that was subsequently axiomatized by Frisch (1926)
and others. The extension of this view to differences between probability dis-
tributions or risky ventures is considered by Hagen (1979) and Allais (1979,
1988).
The formal axiomatic theory of von Neumann and Morgenstern is devoid of
allusion to comparable preference differences. Its axioms are stated solely in terms
of a simple preference relation on their set f/of things to be compared: there is no
hint of a relation like in (6). Jensen's axioms 1 through 3 ofthe preceding sec-
tion illustrate the point. Moreover, their formal theory makes no reference to out-
comes, so the question of whether it has anything to do with riskless intensive
utility for outcomes is meaningless. We will say more about this shortly.
Their informal discussion of their theory is another matter, since it makes
reference to comparable differences in preference or utility in a sometimes confus-
ing way. According to Ellsberg (1954)
134 PETER FISHBURN
This discussion has not established yet that von Neumann and Morgenstern do
not themselves regard their operation, mistakenly, as measuring differences in
satisfaction. The evidence for this is their repeated rejection ofthe notion that an
individual reaches decisions in risk-taking situations by calculating differences
in utilities, their brand or any other. . . .But much confusion probably stems
from the fact that they are prone to write in large, clear type about comparing
differences in preferences and to discard such notions in fine print at the bottom
of the page. (p. 551)
Ellsberg goes on to illustrate how von Neumann and Morgenstern offer the
comparable-differences bait only to retract it an instant later. We shall note this
during the exegesis.
Others of course support the separation of the von Neumann-Morgenstern
theory from older doctrines. In the words of Baumol (1958),
It is not the purpose of the Neumann-Morgenstern utility index to set up any
sort of measure of introspective pleasure intensity. (p. 665)
Several years earlier. Arrow (1951) noted that, for von Neumann and Morgen-
stern,
. . . the utilities assigned are not in any sense to be interpreted as some intrinsic
amount of good in the outcome (p. 425)
In their account of common mistakes that people make about the von Neumann-
Morgenstern theory. Luce and Raiffa (1957) offer us
Fallacy 3. Suppose that A > B > C > D and that the utility fuction has the prop-
erty that u(A) - u(B) > u(C) - u(D), then the change from B to A is more pre-
ferred than the change from D to C. (p. 32)
But not everyone agrees that von Neumann and Morgenstern did not set out to ax-
iomatize an older version of cardinal utility. The most vocal dissenter may be
Allais (1979), who quotes four brief passages on von Neumann and Morgenstern
and goes on to say in his own words that
For all these passages... it results that von Neumann-Morgenstem indeed aim
to determine differences in satisfaction (or utility), that according to them such
differences cannot be determined by direct experiment, and that therefore it is
necessary to consider indirect experiments considering random choice. (p. 592)
Allais says nothing here about the von Neumann-Morgenstern retractions, or
what Ellsberg refers to as "their repeated rejection" and the "fine print." Allais
swallows the bait and ignores the retractions.
Allais's severe misinterpretation of von Neumann and Morgenstern's intentions
might be exacerbated by his repeated use of neo-Bemoullian to characterize
various renditions of their theory. Bernoulli's functional form 2 p{x)u{x) does
follow from the von Neumann-Morgenstern linear representation when X is in-
troduced, but his other main proposition, the riskless intensity view of outcome
utility, has no place in their theory. This view is, however, a cornerstone of Allais's
own theory, which might equally well be referred to as neo-Bemoullian although it
rejects Bernoulli's expectation form. Since the theories of von Neumann-
Morgenstern and Allais each have a different foot in Bernoulli's foundation, it
would seem desirable to avoid the use of neo-Bemoullian for either alone.
Others have made misleading statements about von Neumann-Morgenstern
utility or have stumbled over the passages in their book that, when taken out of
context, could suggest their interest in characterizing an interpretation of utility
that they firmly reject. For example, Marschak (1979, p. 165 and footnote 4) gives
the impression that theories like von Neumann and Morgenstern's follow Ber-
noulli in the measurement of outcome utility, but corrects this misrepresentation
on page 166. Friedman and Savage (1948), beginning with A > B > C, add that
If, in addition, the individual should show by his market behavior that he pre-
fers a 50-50 chance of^ or C to the certainty ofB, it seems natural to rationalize
this behavior by supposing that the difference between the utilities he attaches to
A and B is greater than the difference between the utilities he attaches to B and C,
so that the expected utility ofthe preferred combination is greater than the utility
offi. (p. 282)
They appear to apologize for this early near-example ofthe Luce-Raiffa Fallacy 3
in their later paper (Friedman and Savage, 1952), and it is not repeated in Savage's
valuable sketch on utility (1954, pp. 91-104). Robertson (1954, part II) is hopelessly
confused about the relationships among von Neumann-Morgenstern utility, com-
parable differences, and diminishing marginal utility. Jensen (1967a, p. 172)
speaks about "strength of... preference" in a way that might suggest the old no-
tion of measurability for his subsequent axioms, and in Jensen (1967b) he claims
that a calculation
clearly shows that von Neumann-Morgenstern's utility measure is a method of
indirect comparison of utility differences. (p. 233)
Although Jensen did not intend to convey an alliance between strength of prefer-
ence and the von Neumann-Morgenstern approach by these remarks, they do
give that impression. In fact, if there is any legitimate meaning to a utility dif-
ference within the von Neumann-Morgenstern theory without the imposition of
further axioms, it is only as an algebraic difference defined from their utility func-
tion that has no particular relationship to strength of preference, preference-
136 PETER FISHBURN
difference comparisons, or notions of "a psychological entity measurable in its
own right."
2.2. Logical consistency
The von Neumann-Morgenstern axioms are logically consistent, and their proof
of the linear utility representation in the Appendix added to the 1947 edition is
mathematically faultless. While most later writers do not challenge this, a few
statements deserve comment. Three of these illustrate different sides of the
matter.
In his excellent survey of economic consumption theory, Houthakker (1961)
says in regard to theories like that of von Neumann and Morgenstern, which em-
phasize choice among "generalized lottery tickets" that
The principal result in this approach, first obtained by Marschak (1950) and
definitively established by Herstein and Milnor (1953), is that consistent choice
among such tickets implies the existence of a cardinal utility function, (p. 725)
This misattribution of priority is perhaps explained by the fact that Houthakker
references only the first edition of von Neumann and Morgenstern (1944) and, like
them, makes no mention of Ramsey (1931).
More troublesome is Bernard's (1986) claim that there is a flaw in von Neumann
and Morgenstern's reasoning (p. 124) or, as he puts it later.
. . . a difficulty in the formal deduction of the function u from the axi-
oms. . . . (p 129)
This opinion has nothing to do with their mathematics, but instead reveals a mis-
interpretation of their theory.
Pope (1986) writes about
. . . a logical contradiction in von Neumann and Morgenstern's postulates
about when events occur. (p_ 215)
. . . a timing inconsistency in von Neumann and Morgenstern's set of ax-
ioms, (p 225)
This is simply wrong, since their axioms say nothing about time. However, Pope
does raise good questions about timing effects on choice under risk or uncertainty.
Access to the growing literature about the times that outcomes occur and one's
knowledge about those times is available in her references.
2.3. Timing
Von Neumann and Morgenstern offered their theory in a static or instantaneous
mode. They attempted in their subsection 3.3.3 to avoid complications arising
from "preferences between events in different periods of the future." Nevertheless,
their later comments on their axiom for algebraic simplification of compound
events and on a "utility of gambling" hint at dynamic considerations. Because
phrases such as "reduction of compound lotteries" and comparisons between lot-
teries that are resolved in two or more steps owe more to later writers than to von
Neumann and Morgenstern, I believe it is closer to their own intentions to view
their theory statically. For preference comparisons between probability dis-
tributions on outcomes, this simply means that one compares distributions holis-
tically rather than in some multiple-step format. I agree with Allais (1979/1952) on
the holistic perspective, but in any event one can judge for oneself from the von
Neumann-Morgenstern account.
2.4. Uses of utility
In reading that account, it is important to bear in mind that the authors use utility
in several ways that have qualitative as well as quantitative significance. In speak-
ing of their own theory, von Neumann and Morgenstern most frequently use
utility, unmodified, in a qualitative sense as an entity in their set f/to which their
preference relation applies. The representational theory of measurement sketched
in the preceding section might denote their qualitative structure by (U, >). With w,
V G [/, they advise us to read w > v as "u is preferable to v" (p. 24), and they refer to
w, V. . . . as utilities, (abstract) utilities, events, and combinations (of events).
When von Neumann and Morgenstern talk about what we refer to today as their
linear utility function, they almost always talk about numerical utility, or numerical
valuation (values) of utility. Their utility function is denoted by v, and their expres-
sion of the linearity property (7) is
v(aw + (1 - a)v) = av(w) + (1 - a)v(v).
Examples of their usage are
Denote the correspondence by
u -* p = v(w),
u being the utility and v(w) the number which the correspondence attaches to
it. (p. 24)
and
138 PETER FISHBURN
We will prove in this Appendix, that the axioms of utility enumerated in 3.6.1.
make utility a number up to a linear transformation.' ['I.e. without fixing a zero
or a unit of utility]. (p. 617)
Although their language has been troublesome to some, their theory is one of
the best early examples ofthe representational theory of measurement in the so-
cial sciences.
2.5. Indifference and independence axioms
Readers who are familiar with a later rendition ofthe von Neumann-Morgenstern
theory, but not with the original or with commentaries that connect the two, are
likely to encounter three mysteries in the original:
Mystery 1: Nothing is said about a set of outcomes;
Mystery 2: There is no indifference relation (~);
Mystery 3: There is no obvious independence axiom.
The following explications are indebted to Malinvaud's (1952) remarkable one-
page solution of all three mysteries.
1. The von Neumann-Morgenstern domain set f/is formulated abstractly and
endowed with closure and other properties based on an abstract convexitylike
operation written as aw + (1 a)v for 0 < a < 1. There is no need to speak about
outcomes, or probability distributions for that matter, and as just noted the mem-
bers of U are usually called utilities. Herstein and Milnor (1953) and Fishburn
(1970) also talk about a mixture set, which is essentially the same as U. However,
later authors treat indifference differently.
2. In fact, the usual ~ relation does not appear in the von Neumann-
Morgenstern theory, and instead they speak about true identity (u = v, clarified in
their Appendix). In terms of later renditions, this signifies that they viewed ~ as an
equivalence relation (refiexive, symmetric, and transitive) that is divided out before
they apply > to their domain set U. In other words, U is an abstract set of indif-
ference classes and each utility u is one ofthe indifference classes. Their Appendix
notes the possibility of axiomatizing indifference also, but they observe that their
approach is "mathematically perfectly sound," which it is.
3. Using the notation ofthe preceding section, the independence axiom adopted
by Jensen (1967a), i.e.,
p > q ^Xp + {\ - X)r > Xq + [I - X)r,
is closely akin to versions of Samuelson's "strong independence axiom," for
example
p>q=^Xp + {\ - X)r>Xq + {\ - X)r (Samuelson, 1952)
p ~ q =>Xp + {\ - X)r ~ Xq + {\ - Xy (Malinvaud, 1952)
and to the even sparer independence axiom
p ~ q =^ Vip + Vir ~ Viq + Vir
of Herstein and Milnor (1953). In the second expression, >denotes the union of >
and ~. The mystery of why nothing like these axioms appears explicitly among
those of von Neumann-Morgenstern is resolved by the answer to mystery 2. Sup-
pose/? and^ are in the same member M oft / andri s in a membervof {/. Then/? ~
q. Moreover, with w = Xu + {\ - X)v, and = viewed as true identity, it must be true
that both A/7 + (1 -X)randXq + (1 - >^)rare in vv. Butthen A/7 + {}-Xy ~Xq + {\
- Xy, so we obtain Malinvaud's version of Samuelson's strong independence
axiom. Jensen's strict-preference version can be obtained by appealing to axioms
stated explicitly by von Neumann and Morgenstern.
Finally, it must be recalled that these explanations overlaid later developments
on the formal theory of von Neumann and Morgenstern, who were quite content
to bypass indifference for the sake of parsimony in the mathematical presentation
and to leave its discussion to their informal preparation and, in the second edition,
to the Appendix also.
3. Preface to the third edition
The papers by Samuelson (1952) and Malinvaud (1952) were part of a brief sym-
posium on independence in the October 1952 issue oiEconometrica. After citing
the symposium papers in their preface to the third edition, von Neumann and
Morgenstern go on to say that
Ln connection with the methodological critique exercised by some of the con-
tributors to the last-mentioned symposium, we would like to mention that we
applied the axiomatic method in the customary way with the customary pre-
cautions. Thus the strict, axiomatic treatment ofthe concept of utility (in Section
3.6. and in the Appendix) is complemented by an heuristic preparation (in Sec-
tions 3.1.-3.5.). The latter's function is to convey to the reader the viewpoints to
evaluate and to circumscribe the validity of the subsequent axiomatic pro-
cedure. In particular our discussion and selection of "natural operations" in
those sections covers what seems to us the relevant substrate ofthe Samuelson-
Malinvaud "independence axiom." (p. viii)
The "natural operations" spoken of here refer to preference and the combination
OM + (1 a)v of utilities u and v with probabilities a and (1 a) respectively. The
140 PETER FISHBURN
"substrate" constitutes the ideas developed in their "heuristic preparation" that
support and give substance to the formal theory in section 3.6.
Before they begin their heuristic preparation in section 3.1, von Neumann and
Morgenstern place their treatment of utility within their larger concern with the
theory of games.
The conceptual and practical difficulties ofthe notion of utility, and particularly
ofthe attempts to describe it as a number, are well known and their treatment is
not among the primary objectives of this work. We shall nevertheless be forced
to discuss them in some instances, in particular in 3.3. and 3.5. Let it be said at
once that the standpoint ofthe present book on this very important and very in-
teresting question will be mainly opportunistic. We wish to concentrate on one
problemwhich is not that ofthe measurement of utilities and of preferences
and we shall therefore attempt to simplify all other characteristics as far as
reasonably possible. (p. 8)
According to Savage (1954),
Von Neumann and Morgenstern initiated among economists and, to a lesser ex-
tent, also among statisticians an intense revival of interest in the technical utility
concept by their treatment of utility, which appears as a digression in [their
book]. (p. 97)
But what a digression! Its impact could scarcely have been imagined. Shortly
before he died (in 1977; von Neumann passed away in 1957), Morgenstern (1979)
wrote that
It is one of the great pleasures of my life that those few passages we wrote on
utility theory have provided so much stimulus for others to concern themselves
deeply and in a fresh manner with the notion of utility which is forever basic for
any economic theory. (p. 182)
It is to "those few passages" that we now turn.
4. Initial preparations
The von Neumann-Morgenstern treatment of utility is mainly found in section 3,
titled The Notion of Utility, of their chapter I. The ensuing quotations retain their
subsection headings for easy reference, but omit page numbers: 3.1.1 begins on
page 15; 3.7.3 concludes on page 29. We begin at the start oi The Notion of
Utility.
3.1.1. We have stated already in 2.1.1. in what way we wish to describe the fun-
damental concept of individual preferences by the use of a rather far-reaching
notion of utility. Many economists will feel that we are assuming far too
much . . . and that our standpoint is a retrogression from the more cautious
modern technique of "indifference curves."
Here, and later, their references to "indifference curves" signify the indifference-
map approach ofthe ordinalists described in the paragraph surrounding (5) in our
section 1.
The next paragraph of 3.1.1 gives a brief apologia for their "high handed treat-
ment of preferences and utilities." This is followed by
We feel, however, that one part of our assumptions at leastthat of treating
utilities as numerically measurable quantitiesis not quite as radical as is often
assumed in the literature. We shall attempt to prove this particular point in the
paragraphs which follow. It is hoped that the reader will forgive us for discuss-
ing only incidentally in a condensed form a subject of so great a conceptual im-
portance as that of utility. It seems however that even a few remarks may be
helpful, because the question of the measurability of utilities is similar in
character to corresponding questions in the physical sciences.
Their subsequent analogies to measurement in the physical sciences give them
familiar ground for speaking about utility measurement. Their allusions to "radi-
cal" assumptions "in the literature" concern intensive introspective approaches
and difference comparisons described earlier. This is their first indication that
they are not interested in resurrecting some previous notion of cardinal utility. The
narrative continues on a historical note.
3.1.2. Historically, utility was first conceived as quantitatively measurable, i.e.
as a number. Valid objections can be and have been made against this view in
its original, naive form. It is clear that every measurementor rather every
claim of measurabilitymust ultimately be based on some immediate sensa-
tion, which possibly cannot and certainly need not be analyzed any futher.'
['Such as the sensations of light, heat, muscular effort, etc., in the corresponding
branches of physics.] In the case of utility the immediate sensation of prefer-
enceof one object or aggregate of objects as against anotherprovides this
basis. But this permits us only to say when for one person one utility is greater
than another. It is not in itself a basis for numerical comparison of utilities for
one person nor of any comparison between different persons. Since there is no
intuitively significant way to add two utilities for the same person, the assump-
tion that utilities are of non-numerical character even seems plausible. The
modern method of indifference curve analysis is a mathematical procedure to
describe this situation.
Thus indifference curve analysis provides an expression ofthe greater-than aspect
of preference, but objections can be raised about going beyond this point.
142 PETER FISHBURN
They continue in 3.2 with further remarks on the theories of heat and energy,
concluding with
3.2.2. The historical development ofthe theory of heat indicates that one must
be extremely careful in making negative assertions about any concept with the
claim to finality. Even if utilities look very unnumerical today, the history ofthe
experience in the theory of heat may repeat itself, and nobody can foretell with
what ramifications and variations.' ['A good example ofthe wide variety of for-
mal possibilities is given by the entirely different development ofthe theory of
light, colors, and wave lengths. All these notions too became numerical, but in
an entirely different way.] And it should certainly not discourage theoretical ex-
planations ofthe formal possibilities of a numerical utility.
So caution is in order, but let us proceed.
5. Introduction to numerical utility
3.3.1. We can go even one step beyond the above double negationswhich were
only cautions against premature assertions ofthe impossibility of a numerical
utility. It can be shown that under the conditions on which the indifference
curve analysis is based very little extra effort is needed to reach a numerical
utility.
It has been pointed out repeatedly that a numerical utility is dependent upon
the possibility ofcomparing differences in utilities. This may seemand indeed
isa more far-reaching assumption than that of a mere ability to state prefer-
ences. But it will seem that the alternatives to which economic preferences must
be applied are such as to obliterate this distinction.
The "repeatedly" includes Pareto, who is mentioned later, and perhaps others
such as Frisch (1926) and Alt (1936), who are not referenced.
The preceding passage may be the first bait-retraction pair that we alluded to
early in section 2 at Ellsberg's quote, but its final sentence is obscure. However,
what they say next suggests that "obliterate this distinction" means that difference
comparisons are rendered irrelevant, if they have any meaning at all, by allowing
the basic preference relation to apply to entities for which it has not customarily
been used.
3.3.2. Let us for the moment accept the picture of an individual whose system of
preferences is all-embracing and complete, i.e. who, for any two objects or rather
for any two imagined events, possesses a clear intuition of preference.
More precisely we expect him, for any two alternative events which are put
before him as possibilities, to be able to tell which of the two he prefers.
It is a very natural extension of this picture to permit such an individual to
compare not only events, but even combinations of events with stated prob-
abilities.
By a combination of two events we mean this: Let the two events be denoted
by i5 and C and use, for the sake of simplicity, the probability 50%-50%. Then the
"combination" is the prospect of seeing fi occur vrith a probability of 50% and (if
B does not occur) C with the (remaining) probability of 50%. We stress that the
two alternatives are mutually exclusive, so that no possibility of complemen-
tarity and the like exists. Also, that an absolute certainty of the occurrence of
either B or C exists.
Their "combinations of events" are essentially the same as what others refer to as
lotteries, gambles, risky prospects, random prospects, options, and probability dis-
tributions. The novelty of their approach lies in their consideration of preference
between such entities. The omission of indifference in the passage refiects its sup-
pression in their later axiomatization.
The end of their next paragraph through footnote 1 "is probably the greatest
single source of misunderstanding" (Ellsberg, 1954, p. 552) of their intentions. The
retraction is in footnote 2.
To restate our position. We expect the individual under consideration to possess
a clear intuition whether he prefers the events to the 50-50 combination of B or
C, or conversely. It is clear that if he prefers^ to B and also to C, then he will pre-
fer it to the above combination as well; similariy, if he prefers fi as well asCtOy4,
then he will prefer the combination too. But if he should prekrA to, say B, but at
the same time C to A, then any assertion about his preference of A against the
combination contains fundamentally new information. Specifically: If he now
prefers/I to the 50-50 combination of fi and C, this provides a plausible base for
the numerical estimate that his preference of A over B is in excess of his prefer-
ence of C over/l.'^ ['To give a simple example: Assume that an individual pre-
fers the consumption of a glass of tea to that of a cup of coffee, and the cup of
coffee to a glass of milk. If we now want to know whether the last preference
i.e., difference in utilitiesexceeds the former, it suffices to place him in a situa-
tion where he must decide this: Does he prefer a cup of coffee to a glass the con-
tent of which will be determined by a 50%-50% chance device as tea or milk.]
^Observe that we have only postulated an individual intuition which permits
decision as to which of two "events" is preferable. But we have not directly pos-
tulated any intuitive estimate ofthe relative sizes of two preferencesi.e. in the
subsequent terminology, of two differences of utilities. This is important, since
the former information ought to be obtainable in a reproducible way by
mere "questioning."]
Thus only simple preference comparisons are sanctioned; anything more, includ-
ing numerical estimates of differences, have meaning only in this sense. (See Ells-
berg, 1954, p. 552 for more about their "estimate.")
^^ PETER FISHBURN
I believe that von Neumann and Morgenstern brought differences into the pic-
ture for two main reasons. The first was to touch base with the familiar notion of
preference-difference comparisons as a suggestive device, and to also disclaim its
relevance to their own theory. To step out of sequence for a moment, here is
another example, from their Appendix (pp. 630-631):
. . . No matter how much the utility v exceeds (or is exceeded by) the utility w,
and no matter how little the utility w exceeds (or is exceeded by) the utility u, if v
is admixed to u with a sufficiently small numerical probability, the difference
that this admixture makes from u will be less than the difference of w from M . . . '
[' . . . The reader will also note that we are talking of entities like "the excess of v
over M" or the "excess of u over v" or (to combine the two former) the "dis-
crepancy of w and v" (u, v, being utilities) merely to facilitate the verbal
discussionthey are not part of our rigorous, axiomatic system.]
The second reason for introducing differences was to make the mathematical point
that even though their own approach used only simple preference comparisons, it
had at least as much power in arriving at cardinal utility as the difference method
of Pareto and others. Since the following passage is based on simple comparisons
between combinations of events and proceeds by analogy to the older method, it
should not be interpreted as condoning that method. We continue in sequence
from the preceding footnote 2.
If this standpoint is accepted, then there is a criterion with which to compare the
preference of C overy4 with the preference of ^ over B. It is well known that
thereby utilitiesor rather differences of utilitiesbecome numerically mea-
surable.
That the possibility of comparison between/I, B, and C only to this extent is
already sufficient for a numerical measurement of "distances" was first observed
in economics by Pareto. Exactly the same argument has been made, however, by
Euclid for the position of points on a linein fact it is the very basis of his classi-
cal derivation of numerical distances.
The introduction of numerical measures can be achieved even more directly
if use is made of all possible probabilities. Indeed: Consider three events, C. A. B,
for which the order ofthe individual's preferences is the one stated. Let a be a
real number between 0 and 1, such that/I is exactly equally desirable with the
combined event consisting of a chance of probability 1 - a for fl and the
remaining chance of probability a for C. Then we suggest the use of a as a
numerical estimate for the ratio ofthe preference of^ over J5 to that of C over R
An exact and exhaustive elaboration of these ideas requires the use ofthe ax-
iomatic method. A simple treatment on this basis is indeed possible. We shall
discuss it in 3.5-3.7.
6. Time, probability, and indifference curves
Having prepared us for their later discussion of numerical utility, von Neumann
and Morgenstern reflect on other concerns.
3.3.3. To avoid misunderstandings let us state that the "events" which were used
above as the substratum of preferences are conceived as future events so as to
make all logically possible alternatives equally admissible. However, it would be
an unnecessary complication, as far as our present objectives are concerned, to
get entangled with the problems ofthe preferences between events in different
periods ofthe future. It seems, however, that such difficulties can be obviated by
locating all "events" in which we are interested at one and the same, standard-
ized moment, preferably in the immediate future.
My comments on timing in section 2 refer to this paragraph. See also Pope (1986)
for concerns about certain versus risky options.
Following a brief paragraph on their need for a numerical concept of probabil-
ity, the authors continue.
Probability has often been visualized as a subjective concept more or less in the
nature ofan estimation. Since we propose to use it in constructing an individual,
numerical estimation of utility, the above view of probability would not serve
our purpose. The simplest procedure is, therefore, to insist upon the alternative,
perfectly well founded interpretation of probability as frequency in long runs.
This gives directly the necessary numerical foothold.^ pif one objects to the fre-
quency interpretation of probability then the two concepts (probability and
preference) can be axiomatized together. This too leads to a satisfactory numeri-
cal concept of utility which will be discussed on another occasion.]
A particular interpretation of probability for their formal theory is beside the
point, since their domain set f/makes no mention ofprobability perse but only of
numbers in the interval (0, 1). However, they do want to avoid a vague concept in
informal interpretation and appeal to the long-run frequency idea developed by
Venn (1962/1886), von Mises (1957/1928), and Reichenbach (1949/1935), among
others. The joint axiomatization ofprobability and utility mentioned in the foot-
note was not carried out by von Neumann and Morgenstern, but Morgenstern
(1979, p. 176) cites Pfanzagl (1967, 1968) in this regard while overlooking Ramsey
(1931) and Savage (1954).
Further remarks on comparability and indifference come next.
3.3.4. This procedure for a numerical measurement of the utilities of the in-
dividual depends, of course, upon the hypothesis of completeness in the system
146 PETER FISHBURN
of individual preferences. It is conceivableand may even in a way be more
realisticto allow for cases where the individual is neither able to state which of
two alternatives he prefers nor that they are equally desirable. In this case the
treatment by indifference curves becomes impracticable too." [''These problems
belong systematically in the mathematical theory of ordered sets. The above
question in particular amounts to asking whether events, with respect to prefer-
ence, form a completely or a partially ordered set. Cf. 65.3.]
Their main point here is that if two things are incomparable, then one cannot even
obtain an ordinal utility function as in (1). Section 65.3, mentioned in the footnote,
discusses partial orders and acyclic relations. The first axiomatization of a von
Neumann-Morgenstern-type linear utility function for these cases is due to
Aumann (1962). Later contributions are noted in Fishburn (1988a, p. 53).
Subsection 3.3.4 concludes by reiterating the point made at the opening of 3.3.1
that if one goes as far as an ordinal utility representation, then their approach re-
quires little more to obtain a cardinal utility representation. And section 3.3 con-
cludes with additional comments on the desirability of pursuing the details that
lead to such a representation.
7. "Natural" operations
Section 3.4 opens with a repeat of the difference theme and the by-now-
familiar retraction.
3.4.1. The reader may feel, on the basis ofthe foregoing, that we obtained a
numerical scale of utility only by begging the principle, i.e., by really postulating
the existence of such a scale. We have argued in 3.3.2. that if an individual pre-
fers^ to the 50-50 combination offi and C (while preferring C to y4 and A toB),
this provides a plausible basis for the numerical estimate that this preference of
A over B exceeds that ofCovcrA. Are we not postulating hereor taking it for
grantedthat one preference may exceed another, i.e. that such statements con-
vey a meaning? Such a view would be a complete misunderstanding of our
procedure.
3.4.2. We are not postulatingor assuminganything of the kind. We have
assumed only one thingand for this there is good empirical evidence-
namely that imagined events can be combined with probabilities. And therefore
the same must be assumed for the utilities attached to them,whatever they
may be.
At this point von Neumann and Morgenstern expand on their earlier ties to physi-
cal measurement in 3.2 with the introduction of "natural" operations, which in my
eariier terms usually involve qualitative structures.
3.4.3. In all these cases where such a "natural" operation is given a name which
is reminiscent of a mathematical operationlike the instances of "addition"
aboveone must carefully avoid misunderstandings. This nomenclature is not
intended as a claim that the two operations with the same name are identical,
this is manifestly not the case; it only expresses the opinion that they possess
similar traits, and the hope that some correspondence between them will ul-
timately be established. This of coursewhen feasible at allis done by finding
a mathematical model for the physical domain in question, within which those
quantities are defined by numbers, so that in the model the mathematical opera-
tion describes the synonymous "natural" operation.
We recognize here an elementary expression of the representational theory of
measurement. A sophisticated treatment of this theory for the physical sciences
appears in chapter 10 of Krantz et al. (1971).
8. Transformations
Section 3.4 continues, after examples of "natural" and mathematical operations in
physics, with
3.4.4. Here a further remark must be made. Assume that a satisfactory mathe-
matical model for a physical domain in the above sense has been found, and
that the physical quantities under consideration have been correlated with
numbers. In this case it is not true necessarily that the description (of the
mathematical model) provides for a unique way of correlating the physical
quantities to numbers; i.e., it may specify an entire family of such correlations
the mathematical name is mappingsany one of which can be used for the pur-
poses ofthe theory. Passage from one of these correlations to another amounts
to a transformation ofthe numerical data describing the physical quantities. We
then say that in this theory the physical quantities in question are described by
numbers up to that system of transformations. The mathematical name of such
transformation systems is groups.
A group of transformations for a mathematical model is tantamount to the set of
all functions that map a qualitative structure into a quantitative structure. We have
used their up to designation to describe the uniqueness characters of ordinal utility
and cardinal utility in section 1.
Von Neumann and Morgenstern go on to describe different types of transforma-
tion systems. The most important for our discussion are functions unique up to
monotone transformations, which are based on only a "natural" relation of "greater,"
and functions unique up to linear transformations, which they illustrate with the
physical concept of energy. They then draw a historical parallel for the treatment
of utility by observing that "temperature was originally a number only up to a
148 PETER FISHBURN
monotone transformation" but with "the development of thermometry... the
transformations were restricted to linear ones, i.e. only the absolute zero and ab-
solute unit were missing" (p. 23).
For utility the situation seems to be of a similar nature. One may take the at-
titude that the only "natural" datum in this domain is the relation "greater," i.e.
the concept of preference. In this case utilities are numerical up to a monotone
transformation. This is, indeed, the generally accepted standpoint in economic
literature, best expressed in the technique of indifference curves.
To narrow the system of transformations it would be necessary to discover
further "natural" operations or relations in the domain of utility. Thus it was
pointed out by Pareto'' fK Pareto, Manuel d'Economie Politique, Paris, 1907, p.
264.] that an equality relation for utility differences would suffice; in our ter-
minology it would reduce the transformation system to the linear transfor-
mations. However, since it does not seem that this relation is really a "natural"
onei.e. one which can be interpreted by reproducible observationsthe sug-
gestion does not achieve the purpose.
Thus they reject Pareto's approach to cardinal utility because its difference rela-
tion is not "natural." In particular, their approach of choice between combinations
provides direct access to numerical comparisons used in constructing their utility
funcfion, but there is nothing like this for the preference-difference conception,'
which must rely on introspection.
9. Tbe utility correspondence
The next .paragraph describes their alternative to Pareto's approach in light of
what they consider "natural."
3.5.1. The failure of one particular device need not exclude the possibility of
achieving the same end by another device. Our contention is that the domain of
utility contains a "natural" operation which narrows the system of transfor-
mations to precisely the same extent as the other device would have done. This is
the combination of two utilities with two given alternative probabilities a, 1 a,
(0 < a < 1) as described in 3.3.2. The process is so similar to the formation of
centers of gravity mentioned in 3.4.3. that it may be advantageous to use the
same terminology. Thus we have for utilities u, v the "natural" relation u > v
(read: u is preferable to v), and the "natural" operation a + (1 - a)v, (0 < a < 1),
(read: center of gravity ofw, v with the respective weights a, 1 - a; or: combina-
tion of M, V with the alternative probabilities a, 1 - a). If the existenceand re-
producible observabilityof these concepts is conceded, then our way is clear:
We must find a correspondence between utilities and numbers which carries the
relation u > v and the operation aw + (1 - a)v for utilities into the synonymous
concepts for numbers.
The main thing they have not told us is that the utilities u and v are being viewed as
indifference classes of combinations or probability distributions. This becomes
clear only when one studies their ensuing axioms and the 1947 Appendix.
Having sketched their qualitative structure, von Neumann and Morgenstern
become notationally more explicit about their quantitative (numerical) structure
and the mapping or "correspondence" that ties the two together.
Denote the correspondence by
u -f p = V( M) ,
u being the utility and V(M) the number which the correspondence attaches to it.
Our requirements are then:
(3:l:a) u > v implies V(M) > v(v),
(3:l:b) y{au + (1 - a)v) = av(M) + (1 - a)v(v).'
['Observe that in each case the left-hand side has the "natural" concepts for
utilities, and the right-hand side the conventional ones for numbers.]
If two such correspondences
(3:2:a) M ^ p = V(M),
(3:2:b) ^ p' = V'(M),
should exist, then they set up a correspondence between numbers
(3:3) p ^ p ' ,
for which we may also write
(3:4) p' = 0(p).
Since (3:2:a), (3:2:b) fulfill (3:l:a), (3:l:b), the correspondence (3:3), i.e. the func-
tion (t)(p) in (3:4) must leave the relation p > o and the operation ap -I- (1 a)o
unaffected. I.e.
(3:5:a) p > a implies (t)(p) > (t)(o),
(3:5:b) (l)(ap + (1 - a)o) =
Hence (t)(p) must be a linear function, i.e.
(3:6) p' = (t)(p) = (OoP + 0),,
where COQ, ^\ are fixed numbers (constants) with COQ > 0.
So we see: If such a numerical valuation of utilities exists at all, then it is deter-
150
PETER FISHBURN
mined up to a linear transformation. I.e. then utility is a number up to a
linear transformation.
The order-preserving part of their representation (3:l:a) does not need the con-
verse implication, v(w) > v(v) =* w > v, because it follows from the omission of indif-
ference: see (3:A:a) in the next section. The second paragraph spells out in modest
detail what it means to say that their utility function is unique up to a positive
linear transformation. We add "positive" to be more explicit about COQ > 0. The
mathematical term group at the end ofthe quote from 3.4.4 in section 8 refers here
to the set of transformations of real-valued funcfions established by (3:3) through
(3:5:b) and summarized in (3:6).
10. The axioms
This brings us to the axioms for their qualitative structureconsisting ofthe do-
main set t/and its "natural" relation w > v (preference) and "natural" operation aw
+ (1 - a)v (formation of lotteries)that
. . . imply the existence of a correspondence (3:2:a) with the properties (3:l:a),
(3:l:b) as described in 3.5.1.
They note that there is some freedom in choosing the particular axioms that yield
the desired implication, and emphasize that
. . . each axiom should have an immediate intuitive meaning by which its ap-
propriateness may be judged directly.
They say that their axiom set "seems to be essentially satisfactory."
3.6.1. Our axioms are these:
We consider a system {/of entities u,v,w....ln Uarelation is given, w > v, and
for any number a, (0 < a < 1), an operation
aw + (1 a)v = w.
These concepts satisfy the following axioms:
(3:A) u > V is a complete ordering ofU.
This means: Write w < v when v > w. Then:
(3:A:a) For any two w. v one and only one ofthe three following relations
holds:
W = V, w > V, w < V.
(3:A:b) u > v, v > w imply u > w.
(3:B) Ordering and combining.
(3:B:a) M < v implies that w < aw + (1 - a)v.
(3:B:b) w > v implies that w > aw + (1 a)v.
(3:B:c) w < w < v implies the existence ofan a with
aw + (1 a)v < w.
(3:B:d) u > w > v implies the existence ofan a with
aw -I- (1 a)v > w.
(3:C) Algebra of combining.
(3:C:a) aw -I- (1 - a)v = (1 - a)v + aw.
(3:C:b) a(Pw -I- (1 - P)v) + (1 - a)v = yw + (1 - Y)V
where y = ap.
One can show that these axioms imply the existence of a correspondence
(3:2:a) with the properties (3:l:a), (3:l:b) as described in 3.5.1.
Their proof of the final assertion, in the Appendix, "runs along conventional lines
and presents no particular difficulties" (pp. 26-27). In the Appendix itself they say
that a shorter proof might be found later. This indeed turned out to be true (Her-
stein and Milnor, 1953; Fishburn, 1970), although the substance of these later
proofs is similar to the original.
A few technical remarks about their axioms are in order before we turn to
their interpretations.
The final two axioms (3:C:a) and (3:C:b), explain properties ofthe combining
operation aw + (1 - a)v, for all w, v C/andall a (0,1). The expression aw + (1 -
a)v = w near the beginning of 3.6.1 says that f/is closed under the operation, and
might also be considered as an axiom. Under closure, (3:C:a) is a symmetry prop-
erty and (3:C:b) is an algebraic reduction property. The authors take care to note
that the coefficients a, p, and y are always strictly between 0 and 1. This was mod-
ified by Herstein and Milnor (1953) who allow 0 and 1 also and, with the addition
ofthe axiom lw + (1 - l)v = w, refer to their domain set as a mixture set
All structure needed for C/ in connection with the combining operation has been
specified. The other axioms, (3:A) and (3:B), bring the preference relation into the
picture. (3:A:a) and (3:A:b) are the ordering properties of completeness and tran-
sitivity respectively; as von Neumann and Morgenstem emphasize in their Ap-
pendix, = in (3:A:a) is true identity. More has been said about this earlier, at the end
of section 2.
152 PETER FISHBURN
Axiom (3:B:a) is a monotonicity condition, (3:B:b) is its natural dual, (3:B:c) is
an Archimedean or "continuity" postulate, and (3:B:d) is its natural dual. The lat-
ter pairjs mimicked in Jensen's (1967a) axiom 3 of section 1, but neither Jensen
nor Herstein and Milnor has a monotonicity condition. This is because ex-
pressions like (3:B:a) and (3:B:b) follow from their other axioms, including their
independence conditions. Again, see the end of section 2 for further discussion, es-
pecially in regard to the invisibility of an independence axiom in the von
Neumann-Morgenstern set.
11. Interpretations
Von Neumann and Morgenstern follow the preceding list of axioms with words
about their intuitive meanings.
3.6.2. The analysis of our postulates follows:
(3:A:a*) This is the statement of the completeness of the system of in-
dividual preferences. It is customary to assume this when discuss-
ing utilities or preferences, e.g. in the "indifference curve analysis
method." These questions were already considered in 3.3.4. and
3.4.6.
(3:A:b*) This is the "transitivity" of preference, a plausible and generally
accepted property.
(3:B:a*) We state here: If v is preferable to u, then even a chance 1 - a of
Valternatively to wis preferable. This is legitimate since any
kind of complementarity (or the opposite) has been excluded, cf.
the beginning of 3.3.2.
(3:B:b*) This is the dual of (3:B:a*), with "less preferable" in place of
"preferable."
(3:B:c*) We state here: If w is preferable to w, and an even more prefer-
able V is also given, then the combination ofw with a chance 1 - a
of V will not affect w's preferability to it if this chance is small en-
ough. I.e.: However desirable v may be in itself, one can make its
infiuence as weak as desired by giving it a sufficiently small
chance. This is a plausible "continuity" assumption.
(3:B:d*) This is the dual of (3:B:c*), with "less preferable" in place of
"preferable."
(3:C:a*) This is the statement that it is irrelevant in which order the con-
stituents M, V of a combination are named. It is legitimate, par-
ticulariy since the constituents are alternative events, cf
(3:B:a*) above.
(3:C:b*) This is the statement that it is irrelevant whether a combination
of two constituents is obtained in two successive steps,first the
probabilities a, 1 - a, then the probabilities P, 1 - P; or in one
operation,the probabilities y, 1 - y where y = ap.- [^This is of
course the correct arithmetic of accounting for two successive ad-
mixtures of V with w.] The same things can be said for this as for
(3:C:a*) above. It may be, however, that this postulate has a
deeper significance, to which one allusion is made in 3.7.1.
below.
I have only two comments before we consider the authors' final remarks on the
axioms. First, their further mention of indifference curves in (3:A:a*) and refer-
ence back to 3.3.4 and 3.3.6 were probably felt by von Neumann and Morgenstern
to provide ample indication that they were not going to treat indifference ex-
plicitly, especially in view of w = v in (3:A:a). This is supported by the quotation in
section 3 from their 1953 preface. However, the true identity remark in their Appen-
dix and later comments there on indifference (p. 631) suggest that they were aware
of difficulties in the matter prior to Septehiber, 1946, the date of their preface to the
second edition.
Second, we see in (3:C:b*) the two-step idea for interpreting the algebraic reduc-
tion axiom (3:C:b). This has been widely used by later writers to defend the
reasonableness ofindependence axioms like 2 in section 1: if you prefer/? to q and
let X govern the first step, then you ought to prefer Ap + (1 - Xytolxj + {I - X)r.
Moreover, we know that comparisons between lotteries can be quite sensitive to
whether they are stated hoHstically or in a two-step frame (Allais, 1979/1952;
Kahneman and Tversky, 1979; MacCrimmon and Larsson, 1979). Von Neumann
and Morgenstern's "deeper significance" phrase at the end of (3:C:b*) and their
subsequent discussion of a "utility of gambling" (pp. 28 and 629) hint at the latter
possibility. My own views on the matter, with additional references, appear in sec-
tions 2.5 and 8.1 of Fishburn (1988a).
12. Further remarks
Von Neumann and Morgenstern had a good deal more to say about utility, but I
shall be brief
In 3.7.1 they wonder whether there may be a positive or negative "utility ofthe
mere act of'taking a chance,' of gambling, which the use ofthe mathematical ex-
pectation obliterates." They cite (3:C:b) as the axiom that comes closest to exclud-
ing a "utility of gambling," say that its adequate consideration would require "a
much more refined system of psychology . . . than the one now available for the
purposes of economics," and claim that it "cannot be formulated free of contradic-
tion" on the level of their (3:A)-(3:C). Although several attempts to be more sys-
tematic about a "utility of gambling" have been made, I am not aware ofany really
adequate treatment.
Subsection 3.7.2 talks about weakening the completeness axiom. I have already
commented on this in the penultimate paragraph of section 6. It (also p. 631) men-
tions the possibility of weakening the continuity axiom, which leads to the lex-
icographically ordered vector concept of utility axiomatized by Hausner (1954)
54 PETER FISHBURN
and Chipman (1960). The joint weakening of completeness and continuity, which
is also suggested in 3.7.2, is treated axiomatically in Fishburn (1979).
It is fitting to give von Neumann and Morgenstem the last word.
3.7.3. This brief exposition does not claim to exhaust the subject, but we hope
to have conveyed the essential points. To avoid misunderstandings, the follow-
ing further remarks may be useful.
(1) We re-emphasize that we are considering only utilities experienced by one
person. These considerations do not imply anything concerning the com-
parisons of the utilities belonging to different individuals.
(2) It cannot be denied that the analysis of the methods which make use of
mathematical expectation . . . is far from concluded at present. Our remarks in
3.7.1. lie in this direction, but much more should be said in this respect. There
are many interesting questions involved, which however lie beyond the scope of
this work. For our purposes it suffices to observe that the validity ofthe simple
and plausible axioms (3:A)-(3:C) in 3.6.1. for the relation w > v and the opera-
tion au + (I - a)v makes the utilities numbers up to a linear transformation in
the sense discussed in these sections.
13. Postscript
Because von Neumann and Morgenstern did not have an explicit independence
axiom in their system, they obviously could not talk about weakening it. However,
many others have. Allais (1979/1952, 1979) is famous for his examples that refute
the general reasonableness of independence axioms; his own theory rejects in-
dependence and its associated expected-utility form. Reviews of more recent
theories of preference comparisons under risk that weaken traditional indepen-
dence axioms are given by Machina (1987a, 1987b) and Fishburn (1988a,
1988b).
I would like to add some personal notes. In the abstract I spoke about "the
genius and spirit of the theory of utility fashioned by John von Neumann and
Oskar Morgenstern." As an exegete of their work. I have come to a new admiration
for the depth and insight of their "digression" (their own word as well as Savage's)
on utility. It is my hope that the exposition will help others appreciate their
contribution.
I regret that I never met von Neumann, but I was privileged to know Oskar
Morgenstern. His very personable account of their collaboration on the Theory of
Games and Economic Behavior is recorded in Morgenstern (1976).
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