The Value of (Bounded) Memory in a Changing World

22 Pages Posted: 23 Jun 2010 Last revised: 9 Apr 2014

See all articles by Daniel Monte

Daniel Monte

Sao Paulo School of Economics - FGV

Maher Said

NYU Stern School of Business

Date Written: April 8, 2014

Abstract

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

Suggested Citation

Monte, Daniel and Said, Maher, The Value of (Bounded) Memory in a Changing World (April 8, 2014). Economic Theory, 56(1), 59-82, Available at SSRN: https://ssrn.com/abstract=1627224 or http://dx.doi.org/10.2139/ssrn.1627224

Daniel Monte

Sao Paulo School of Economics - FGV ( email )

Rua Itapeva, 474
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Maher Said (Contact Author)

NYU Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

HOME PAGE: http://www.mahersaid.com/

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