Drawing on experience from a variety of real world systems – nuclear power plants, oil rigs, aircraft navigation systems – Tim Harford (2011) illustrates how complex control of a complex environment has often been calamitous. The general message here is that the more complex the environment, the greater the perils of complex control. The optimal response to a complex environment is often not a fully state-contingent rule. Rather, it is to simplify and streamline (Gigerenzer (2010)). In complex environments, decision rules based on one, or a few, good reasons can trump sophisticated alternatives. Less may be more. In Isaiah Berlin’s famous essay “The Hedgehog and the Fox” (Berlin (1953)), the fox knew many things, the hedgehog one big thing. Philosophers continue to debate their relative merits. But sports fans, doctors and detectives have made their choice. They think the hedgehog has the upper paw. Selective unclogging of the cognitive inbox can make for better decisions. (c)  Weighting may be in vain  John von Neumann and Oskar Morgenstern established that optimal decision-making involved probabilistically-weighting all possible future outcomes (von Neumann and Morgenstern (1944)). Multiple regression techniques are the statistical analogue of von Neumann-Morgenstern optimisation, with behaviour inferred by probabilistically-weighting explanatory factors. 3  Gigerenzer and Kurzenhäuser (2005). 4  Snook et al (2005). 5  DeMiguel et al (2007). 6  Wübben and von Wangenheim (2008)). 4  BIS central bankers’ speeches  In an uncertain environment, where statistical probabilities are unknown, however, these approaches to decision-making may no longer be suitable.

There is now a consensus view among central bankers that providing information about policy intentions enhances the effects of monetary policy. However, no consensus has emerged on how to provide it. We may distinguish between three main categories of forward guidance: The traditional form of forward guidance has been to give qualitative statements about future intentions. For instance, some central banks have indicated the anticipated direction of the next change in the policy rate. In 1999, Norges Bank started to make statements such as “the probability that the next change in interest rates will be an increase is greater than the probability of a reduction”. Another example is the Federal Reserve, which has used “code” words such as “bias towards” or “balance of risks”, indicating the same. 3  According to Geraats (2006): “Transparency of Monetary Policy: Theory and Practice,” CESifo Economic Studies 52 (1), central banks seem to have embraced transparency for its perceived economic benefits, rather than accountability requirements. 4  To illustrate, we may consider an inflation-targeting central bank facing inflation below the target. In order to reach the inflation target in this situation, promising to allow inflation to overshoot the target later might help increase inflation today. Commitment in this sense would in practice involve some form of price-level targeting, rather than inflation targeting. 2  BIS central bankers’ speeches  A second approach to forward guidance has been adopted by some central banks when key policy rates have been at a zero lower bound.