Deep reinforcement learning applied to vision-based problems like Atari games maps pixels directly to actions; internally, the deep neural network bears the responsibility of both extracting useful information and making decisions based on it. By separating image processing from decision-making, one could better understand the complexity of each task, as well as potentially find smaller policy representations that are easier for humans to understand and may generalize better. To this end, we propose a new method for learning policies and compact state representations separately but simultaneously for policy approximation in reinforcement learning. State representations are generated by an encoder based on two novel algorithms: Increasing Dictionary Vector Quantization makes the encoder capable of growing its dictionary size over time, to address new observations, and Direct Residuals Sparse Coding encodes observations by aiming for highest information inclusion. We test our system on a selection of Atari games using tiny neural networks of only 6 to 18 neurons (depending on the game's controls). These are still capable of achieving results comparable-and occasionally superior-to state-of-the-art techniques which use two orders of magnitude more neurons.