Optimal Memory with Sequential Learning: Signals or Posterior Beliefs

40 Pages Posted: 15 Apr 2024 Last revised: 19 Apr 2024

See all articles by Collin Raymond

Collin Raymond

Purdue University; Cornell SC Johnson College of Business

Lars Wittrock

Maastricht University - Department of Economics

Date Written: March 19, 2024

Abstract

Agents with memory constraints must make trade-offs as to what information to remember over time. They may choose to remember signals, and form posterior beliefs only when asked; or alternatively, they may only remember posterior beliefs, and neglect to remember past signals. We demonstrate that memory constrained agents who can flexibly and optimally choose what information to remember will alter their choices in response to changes in the decision-making environment. When there is more uncertainty about which states are relevant for a decision, or when there are fewer signals, agents will tend to remember signals, and only form posteriors from signals when required. In contrast, when there is little uncertainty about the decision-relevant states or many signals, agents choose to remember posterior beliefs over the relevant states, and neglect to remember signals.

Keywords: Sequential learning, information processing, memory constraint

JEL Classification: D83, D91, C91

Suggested Citation

Raymond, Collin and Wittrock, Lars, Optimal Memory with Sequential Learning: Signals or Posterior Beliefs (March 19, 2024). Available at SSRN: https://ssrn.com/abstract=4765215 or http://dx.doi.org/10.2139/ssrn.4765215

Collin Raymond (Contact Author)

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Lars Wittrock

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, Limburg 6200MD
Netherlands

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