Risky Learning with Imperfect Recall

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2021-09-07
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Abstract
This paper proposes a model of endogenous memory recall in a general dynamic setting using the framework of rational inattention. I introduce the general model setup in chapter 2 through the lens of a rational Bayesian agent who faces no memory constraints. Building on this framework, I define a memory process in chapter 3. I then study how an exogenous memory process impacts the agent's optimal actions, and I discuss how the agent's choice of actions given her memory constraints can be used to approximate her risk preferences. Finally, endogenous memory costs enter into the agent's welfare maximization problem in chapter 4. These memory costs depend on the agent's memory process, and are amplified by an exogenously-specified ability parameter. I show that in the presence of endogenous memory costs, the agent selects her memory process according to her given ability: higher ability agents choose sharper memory processes, make riskier decisions in the context of learning, and ultimately expect greater welfare.
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Olson, A. (2021). Risky Learning with Imperfect Recall (Master's thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.