Added Apr 25, 2010
I have found that the tidiest way to decrease on this little hat (I have made hundreds of them) is to decrease one stitch, then knit a single loop the next stitch, then decrease another one, and so on.
If you decrease at every stitch, you might get unintended lace, i.e., you can see some holes. It also changes the shape of your work. Of course this may be exactly the desired effect, so experiment to see what looks best for your own project.
This is what the hat looks like after a few rounds of decreasing:
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