  Various previous studies have found that employment and financial security can have an important effect on people’s happiness, over and above their impact on income and wealth. 36  For example, it  is well-established that having a job improves significantly people’s confidence and self-esteem, over and above any effect on pay. Those conclusions are borne out here. We find there is a statistically significant role for unemployment and arrears in explaining household well-being, over and above the effects from income and wealth.   The effects of unemployment and arrears on well-being are quantitatively large. To gauge that, we can translate them into income-equivalent terms using our welfare regression. The effects of having a job are, in well-being terms, equivalent to around 3 months’ extra income on average, across all households. 37  This is consistent with powerful effects of work and financial security on happiness. 38  Using this framework, our earlier quantitative estimates of the impact of looser monetary policy can be translated into welfare terms. Charts 22 and 23 show these welfare benefits, broken down into their component parts (income, wealth, unemployment), looking across the age and income distribution. A few key points stand out. First, the effects of monetary policy in lowering the probability of unemployment have a very material impact on household well-being. These effects often account for more than half of the total welfare gain for households across all cohorts.

Indeed, in these systems the very notion of identification or causation becomes blurred. (b) Heuristic Behaviour  Mainstream models in macro-economics and finance tend to have a fairly sophisticated treatment of risk. Provided the distribution of possible outcomes is reasonably well-understood, this risk can be priced and hedged in financial markets. Saving and investment behaviour can then be analysed under the assumption agents optimise their risk-adjusted decision-making (Haldane (2012)). 22  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  22  A world of radical uncertainty, the like of which is arises in a complex system, changes that perspective fundamentally. Uncertainty means it may sometimes be impossible to compute future outcomes. In the language of computer science, behavioural decisions are no longer “Turing computable” (Beinhocker (2006), Velupillai (2000)). The relevant Euler conditions, familiar from mainstream macro-models, may not even exist. Faced with that uncertainty, it is often rational for agents to rely on simpler decision rules (Gigerenzer (2015)). These are often called “rules of thumb” or heuristics. Use of such rules is sometimes thought to be arbitrary, sub-optimal or irrational. Yet in a world of uncertainty, that is far from clear. Heuristics may be the most robust means of making decisions in a world of uncertainty. Rather than solving a complex inter-temporal optimisation, many consumers appear to follow simple rules of thumb when deciding their spending (Allen and Carroll (2001)). Rather than solving a complex mean-variance optimisation, many investors appear to invest passively or to equally-weight assets in their portfolios (Gigerenzer (2014)).