Expectations can lead to prediction errors of varying degrees depending on the extent to which the information encountered in the environment conforms with prior knowledge. While there is strong evidence on the computationally specific effects of such prediction errors on learning, relatively less evidence is available regarding their effects on episodic memory. Here, we had participants work on a task in which they learned context/object-category associations of different strengths based on the outcomes of their predictions. We then used a reinforcement learning model to derive subject-specific trial-to-trial estimates of prediction error at encoding and link it to subsequent recognition memory. Results showed that model-derived prediction errors at encoding influenced subsequent memory as a function of the outcome of participants’ predictions (correct vs. incorrect). When participants correctly predicted the object category, stronger prediction errors (as a consequence of weak expectations) led to enhanced memory. In contrast, when participants incorrectly predicted the object category, stronger prediction errors (as a consequence of strong expectations) led to impaired memory. These results highlight the important moderating role of choice outcome that may be related to interactions between the hippocampal and striatal dopaminergic systems.