Oskar Morgenstern Quotes

Our knowledge of dynamic processes is necessarily inferior to our ability to describe stationary conditions.

...the facts of economic life cannot be comprehensively described in terms of statistics.

Now, in the modern money economy everything in the nature of a social-economic occurrence consists in human actions and behaviour.

The full treatment of the formal theory of how to make decisions in risky situations—called expected utility theory—was published in 1944 by the mathematician John von Neumann and the economist Oskar Morgenstern. John von Neumann, one of the greatest mathematicians of the twentieth century, was a contemporary of Albert Einstein at the Institute of Advanced Study at Princeton University, and during World War II he decided to devote himself to practical problems. The result was the 600-plus-page opus The Theory of Games and Economic Behavior, in which the development of expected utility theory was just a sideline. The way that von Neumann and Morgenstern created the theory was to begin by writing down a series of axioms of rational choice. They then derived how someone who wanted to follow these axioms would behave. The axioms are mostly uncontroversial notions such as transitivity, a technical term that says if you prefer A over B and B over C then you must prefer A over C. Remarkably, von Neumann and Morgenstern proved that if you want to satisfy these axioms (and you do), then you must make decisions according to their theory. The argument is completely convincing. If I had an important decision to make—whether to refinance my mortgage or invest in a new business—I would aim to make the decision in accordance with expected utility theory, just as I would use the Pythagorean theorem to estimate the altitude of our railroad triangle. Expected utility is the right way to make decisions.