Current LLMs are intelligent enough for many tasks but fail because they lack access to complete context—emails, Slack messages, past data. The next step is building products that ingest this real-world context, making it available for the model to act upon.

To prevent an AI agent from repeating mistakes across coding sessions, create 'agents.md' files in your codebase. These act as a persistent memory, providing context and instructions specific to a folder or the entire repo. The agent reads these files before working, allowing it to learn from past iterations and improve over time.

Instead of relying on lossy vector-based RAG systems, a well-organized file system serves as a superior memory foundation for a personal AI. It provides a stable, navigable structure for context and history, which the AI can then summarize and index for efficient, reliable retrieval.

Structure AI context into three layers: a short global file for universal preferences, project-specific files for domain rules, and an indexed library of modular context files (e.g., business details) that the AI only loads when relevant, preventing context window bloat.

The LLM itself only creates the opportunity for agentic behavior. The actual business value is unlocked when an agent is given runtime access to high-value data and tools, allowing it to perform actions and complete tasks. Without this runtime context, agents are merely sophisticated Q&A bots querying old data.

Claude Code's terminal-based interaction within a specific folder allows it to automatically read and reference local files. This makes "context engineering" drastically faster and more powerful than manually pasting information into a traditional chat interface, as the context is implicitly understood.

Long-running AI agent conversations degrade in quality as the context window fills. The best engineers combat this with "intentional compaction": they direct the agent to summarize its progress into a clean markdown file, then start a fresh session using that summary as the new, clean input. This is like rebooting the agent's short-term memory.

"Context Engineering" is the critical practice of managing information fed to an LLM, especially in multi-step agents. This includes techniques like context compaction, using sub-agents, and managing memory. Harrison Chase considers this discipline more crucial than prompt engineering for building sophisticated agents.

A key advantage of Claude Cowork is its ability to run locally and access files directly on a user's computer. This provides the AI with vastly more context than is possible with cloud tools that have limited file uploads, enabling complex analysis of large, local datasets like hundreds of documents.