The Value of (Bounded) Memory in a Changing World
22 Pages Posted: 23 Jun 2010 Last revised: 9 Apr 2014
Date Written: April 8, 2014
This paper explores the value of memory in decision making in dynamic environments. We examine the decision problem faced by an agent with bounded memory who receives a sequence of signals from a partially observable Markov decision process. We characterize environments in which the optimal memory consists of only two states. In addition, we show that the marginal value of additional memory states need not be positive and may even be negative in the absence of free disposal.
Keywords: Bounded memory, Dynamic decision making, Partially observable Markov decision process
JEL Classification: C61, D81, D83
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