An environment is the external system an agent interacts with, producing feedback as rewards or penalties after actions. In financial planning, it is the stock and bond market surrounding an investor-agent. section 6.2
Model the environment through four connected elements:
- State records relevant variables affecting decisions; the example uses wealth and discrete time. section 6.2
- Action changes the state; the investor allocates a percentage of wealth to a stock fund or risk-free bond. section 6.2
- Rewards and penalties shape future behavior, encouraging actions that improve cumulative reward and discouraging harmful ones. section 6.2
Goals-based investing
Represent possible wealth values across time with a funnel-shaped grid, using log wealth to accommodate widening dispersion as the investment horizon grows. section 6.2
