Pack Light on the Move: Exploitation and Exploration in a Dynamic Environment
17 Pages Posted: 13 Sep 2013
Date Written: April 2013
This paper revisits a recent study by Posen and Levinthal (2012) on the exploration/exploitation tradeoff for a multi-armed bandit problem, where the reward probabilities undergo random shocks. We show that their analysis suffers two shortcomings: it assumes that learning is based on stale evidence, and it overlooks the steady state. We let the learning rule endogenously discard stale evidence, and we perform the long run analyses. The comparative study demonstrates that some of their conclusions must be qualified.
Keywords: adaptation, learning, turbulence, multi-armed bandit problem
JEL Classification: D83
Suggested Citation: Suggested Citation