Common Knowledge: Why I Stopped Avoiding Mass Media


  • Common knowledge is information that everyone believes is shared by everyone else. It’s not what the crowd believes. It’s what the crowd believes what the crowd believes. 
  • It’s an integral part of game theory and critical in understanding how group behaviour changes based on new information.
  • While this concept may not be entirely new, the magnitude of effect of common knowledge is likely under-estimated.
  • Pluralistic ignorance is common knowledge based on false beliefs. Like the Emperor’s New Clothes.
  • Better understanding common knowledge completely changed the way I consume mass media and view soft power.
  • We see the effect of common knowledge in meta-games in financial markets.
  • Of particular interest is the common knowledge that that inflation is dead and the excessive quantitative easing that’s fueled the bull run that recently ended due to COVID-19.

This post:

  1. Common knowledge: definitions and examples
  2. Mass media: how I’ve changed the way I consume media based on common knowledge
  3. Financial markets: brief commentary on the common knowledge game pre and post COVID-19

1. Common knowledge?

April 2020. Perhaps we’re living amidst the biggest social disruption since WWII. We’re being drowned in information. Our behaviours are being shaped by all sorts of forces – visible and invisible, covert and overt, intentional and unintentional, and for gain or harm.

One such force is common knowledge. I doubt this notion is entirely new to most people. It revolves around the “I know that you know that I know” kind of logic. But it’s likely that the magnitude of its effect on our behaviour is under-estimated. From the March toilet paper hysteria to the logic-divorced behaviour of financial markets, wrapping my head around common knowledge has certainly helped me make more sense of things. I hope this can do the same for you.


1.1. Definition 

Common knowledge is information that everyone believes is shared by everyone else.

This is different to a consensus view (what everyone is thinking). Common knowledge is the consensus view of the consensus view (what everyone thinks about what everyone is thinking). A second-order consensus. It’s not what the crowd believes. It’s what the crowd believes what the crowd believes.

Common knowledge is usually a subset of public knowledge, but it doesn’t have to be – it could be private knowledge too.

It also has nothing to do with one’s individual opinion on whether the consensus view is right or wrong; true or false. More on this later (pluralistic ignorance).

The effect of common knowledge on human behaviour has long been understood. 

It’s not enough for everybody to know a fact. Rather, everybody must know that everybody else knows that fact. Certain beliefs are only helpful if everybody in a community commits to them. The need to not only transmit information but create common knowledge explains why public rituals, rallies, and ceremonies are consistent across cultures. They don’t just transmit information. Rather, by making a shared set of beliefs explicit, they serve as an ethical blueprint for the community. Efficiency increases once common knowledge has been established because everybody levels up to a shared baseline of intent and understanding. – David Perell, News in the Age of Abundance

It just takes more thinking to wrap our heads around some of the subtle qualities of it.

Knowledge of the message is not enough… for the message to be successful, each person must not only know about it, each person must know that each other person knows about it. In fact, each person must know that each other person knows that each other person knows about it, and so on; that is, the message must be ‘common knowledge.’” – Michael Chwe, Rational Ritual


1.2. Example 1: Common knowledge about Bob’s employment status.

It’s a shit day for Bob. He’s been made redundant. Management tells him in-person, and HR will follow-up with an email for logistical matters. HR sends Bob the email but accidentally BCCs the entire company. Everyone thinks they were the only one that received the email addressed to Bob by mistake. No one suspects that HR mistakenly sent it to the entire company. Although everyone knows that Bob is being made redundant, this fact is not yet common knowledge. While everyone knows the fact, no one realises that everyone else knows this fact as well.  Bob announces his departure to everyone. Now everyone knows that everyone else knows that Bob is leaving. Bob’s employment status is now common knowledge.


1.3. Example 2: KKK scene in Django

This scene in Django:

KKK guys are riding around with bags. Only when the leader complains about not being able to see/breathe, everyone else starts complaining about it too. Since it’s a group conversation, everyone quickly learns that everyone else was feeling the same way. Not only that, everyone now knows that everyone now knows this fact. The fact that the bags suck is now common knowledge.


1.4. Example 3: Island of green-eyed tribe 

On the island of the green-eyed tribe, blues eyes are taboo. Those with blue eyes need to get on a canoe and leave the island the next morning. But there are no mirrors or reflective surfaces on the island – so no one knows their own eye colour. It is also taboo to talk about eye colour.

So if you see a fellow tribesman with blue eyes, you can’t say anything. This means that no one knows they have blue eyes and therefore no one has ever left the island before. A foreign missionary comes to the island one day and announces “at least one of you have blue eyes.” The missionary is telling the truth and everyone believes the missionary. What happens?

  • Case where only 1 person has blue eyes.
    The blue-eyed person has seen everyone’s green eyes, and thought that he had green eyes too. But given the missionary’s statement, he concludes that he must be the one that has blue eyes. He leaves the island the next morning.
  • Case where 2 people have blue eyes.
    Both blue-eyed tribesmen look at each other and think “so that’s the guy with blue eyes that the missionary is talking about.” Since they both think they themselves don’t have blue eyes, neither of them leave the island the next morning. The next day they’re both surprised to see each other still on the island. “Hang on, if he didn’t leave that means he saw someone else with blue eyes. And since I know that everyone else has green eyes that means… ah shit, I have blue eyes.” So the morning after, both blue-eyed tribesmen leave the island simultaneously.
  • Case where n people have blue eyes.
    The generalized solution is that for any n blue-eyed tribesmen, they all leave simultaneously on the nth morning after the missionary’s statement.


1.5. Game theory lens 

The equilibrium state before the missionary’s arrival was perfect private information: everyone knew everyone else’s eye colour. But this knowledge was siloed inside each individual’s head and not made public.

The rules of the game is embedded in the tribe’s informational structure: no blue-eyes allowed, and no talk of eye colour allowed.

The missionary did not transform private information into public information. He never pointed anyone out. But his announcement was a new piece of information that caused the tribesmen (players) to change their behaviour to move to a new equilibrium state (island with blue-eyed people gone). 

By introducing new public information (announcement that at least 1 has blue eyes) into the informational structure, the missionary did transform private information into common knowledge. Remember, common knowledge can be public or private, so long as everyone believes its shared by everyone else. In this case it’s having blue eyes.

The behaviour change only took place after public or private knowledge (in this case, private) became common knowledge

This is the power of the crowd being able to see the crowd. From business to politics to religion, understanding this has been pivotal to those that have been able to influence so many. For both good and bad. 


1.6. Pluralistic ignorance

There’s two types of common knowledge: 

  • (i) everyone believes, and everyone believes that everyone believes
  • (ii) no one believes, but everyone believes that everyone believes

Pluralistic ignorance is the latter. Common knowledge based on false beliefs. Examples:

  • Insecure teenagers trying to be cool. A bunch of 13 year olds get their hands on beer and try it for the first time. Everyone thinks “this is bitter and I actually don’t like it.” But because everyone’s trying to be “cool” no one will admit they don’t like it. This is common knowledge based on a false belief.
  • COVID-19 panic buying. Toilet paper hysteria was not due to inability to replenish supplies. Most people knew that Australia manufactures its own toilet paper. But despite knowing that there’s no need to panic buy, everyone thought that everyone would panic buy (pluralistic ignorance). Even though there’s no fundamental reason to, the panic buying became self-reinforcing. Now I know that people have a deep fear of not being able to wipe their ass. Myself included.

1.7. Emperor’s new clothes

A refresher on the classic tale if it’s been a while. Some fraudulent tailors convince an emperor that they can create the most marvelous outfit. The caveat is it can only be seen by those who are not stupid. To all the stupid, it’s invisible. The emperor makes the purchase and receives the “clothes” (nothing). Of course, the emperor pretends that he can see the clothes and carries on. All of his servants ignore the nakedness of the emperor, and also pretend to see for the same reason. No one wants to admit they can’t see it as that would admit their stupidity.

As the emperor shows off his new ‘clothes’ in public, the crowd watches in shock and silence. Everyone’s thinking the same thing “why is he naked?” but no one dares to speak up. Because everyone thinks everyone else sees the clothes. Then a young boy yells and points out that the emperor is naked. The crowd joins in and laughs at him. The emperor’s embarrassment shows that he admits that he cannot see the clothes either.

There’s no shortage of naked emperors today.

Image: Star Tribune

2. Common knowledge in mass media

2.1. Why I stopped avoiding mass media

You read that correctly. Not stopped consuming, but stopped avoiding,

I used to avoid the likes of popular broadsheets and evening news like the plague. I was convinced that such pseudo-news actually makes you more stupid, fearful, and ignorant. Thinking you know is even more dangerous than not knowing. “Add sex and stir.” “Broadcast emotions rather than truth.” “Manufacture consent.”

But here’s something that I realized rather recently. If I’m so determined to seek truth, whatever message is broadcast to everyone is a truth in itself. A second-order truth. If everyone is being fed some information, then the fact that everyone is being fed that information is itself truth, regardless of whether that information is true or not. It’s meta-news: news about the news. 

So there’s actually tangible value to be derived from watching the likes of Fox News. It’s important to know what everyone else is thinking about what everyone else is thinking. So long as you view it through a skeptical filter. Instead of “omg I can’t believe that’s what’s happening in the world”, you view it as “this is what most people are being fed and conditioned to believe.”


2.2. Advertisers pay a common knowledge premium

Advertising value obtained is non-linear to the advertising cost.

Super Bowl ads are notoriously expensive. Around $6m for a single 30-second TV ad. This is not only because it’s the biggest event of the year in the US. It’s also because every viewer knows that millions of other people are seeing the same ad. And advertises are happy to pay for this common knowledge premium.

“So for an ad to work by cultural imprinting, it’s not enough for it to be seen by a single person, or even by many people individually. It has to be broadcast publicly, in front of a large audience. I have to see the ad, but I also have to know (or suspect) that most of my friends have seen the ad too.” – Ads Don’t Work That Way

Consider this public health message for instance.

NYC Department of Health & Mental Hygiene

Rather than letting someone view this add privately e.g. via internet, it’s much more effective to display this in a prominent place. Everyone sees the ad, and they also know that others have seen the ad. So next time they’re drinking a sugary drink in public, they’re more likely to feel peer pressure.

This phenomenon has also been understood and leveraged by the fashion and music industries. Rather than designing clothes that you think teenagers would like, you design clothes that teenagers think what their peers would like. 


2.3. Why I stopped underestimating celebrity soft power

Alongside mass media, I also used to avoid celebrity gossip, opinions, and ‘news’. Someone got divorced. Seriously. Who cares? If it appeared on the morning news that my parents would watch over breakfast, I would put deliberate effort into not letting that information enter my system at all. I was convinced that celebrity opinions are way over-priced – they receive so much more weight than deserved. 

I still think they’re over-priced, but certainly not as over-priced as I thought. Because now I realize how naive I was. I didn’t understand the emergent effect of common knowledge. It doesn’t matter if a celebrity’s opinion on something was actually true or not. It also doesn’t matter if most people think it’s true or not. So long as most people think that most others think it’s true, then that in itself gives it power.

A parallel to this is underestimating the strength of soft power in geopolitics. K-pop is more than just entertainment. If it materially influences South East Asia consumer behaviour, it’s a significant business and economics factor. This is also why I give sociology a lot more weighting in understanding the biggest factors that drive change in the world.


3. Common knowledge in financial markets

3.1. Prices reveal common knowledge around market’s expectations of future events

The common knowledge phenomenon is indeed well understood in finance. The market’s expectations on the probability of future events is baked into price. It doesn’t necessarily mean the market’s right. But it does mean that everyone agrees that this is what the majority of the market believes. 

Image: The Economist


3.2. Meta-games in financial markets

There’s mass media for everyday ‘news’. Then there’s media that all business and finance people read. The sources of the “rumour” in the saying “buy the rumour, sell the news.” It’s the big 4 US finance journals, plus every country/region has additional sources that people follow. For Aussies, it’s the AFR of course. 

How do we “see” a crowd in financial markets? Through the financial media outlets that are ubiquitous throughout every professional investment operation in the world — the Wall Street Journal, the Financial Times, CNBC, and Bloomberg.

That’s it. These are the only four signal transmission and mediation channels that matter from a financial market Common Knowledge Game perspective because “everyone knows” that we all subscribe to these four channels. If a signal appears prominently in any one of these media outlets (and if it appears prominently in one, it becomes “news” and will appear in all), then every professional investor in the world automatically assumes that every other professional investor in the world heard the signal. So if Famous Investor X appears on CNBC and says that the latest Fed announcement is a great and wonderful thing for equity markets, then the market will go up. It won’t go up because investors agree with Famous Investor X’s assessment of the merits of the Fed announcement. The market will go up because every investor will believe that every other investor heard what Famous Investor X said, and every investor will be forced to update his or her estimation of what every other investor estimates the market will do. It doesn’t matter what the Truth with a capital T is about the Fed. It doesn’t matter what you think about the Fed. It doesn’t matter what everyone thinks about the Fed. What matters is what everyone thinks what everyone thinks about the Fed. That’s how sheep logic, aka the Common Knowledge Game, works in markets. – A Game of Sentiment, Epsilon Theory

John Maynard Keynes, one of the most influential economists of the 20th century, also understood this.

Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preference of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees. – John Maynard Keynes, The General Theory of Employment, Interest, and Money (1935)


3.3. Excessive quantitative easing and market re-evaluation of inflation

Over the past decade we’ve seen the longest ever bull run since WWII.

Image: Visual Capitalist

Some retail investors may attribute this to the rise of tech giants and earnings growth.

But the thing is, the valuation rise has been exceeded the rise in earnings and labor productivity growth is more or less flat. 

The US market, like all markets, cares about two things and two things only — the price of money and the real return on invested capital. Put simply, interest rates and growth.

Most institutional investors would probably agree that the major contributing factors to the bull run stock buybacks on the back of cheap money. If you’re an executive, why would you bother investing and risking new initiatives when you can make shareholders happy by just buying back your stock?

The reason companies aren’t investing more aggressively in plant and equipment and technology is BECAUSE we have the most accommodative monetary policy in the history of the world, with the easiest money to borrow that corporations have ever seen. Why in the world would management take the risk — and it’s definitely a risk — of investing for real growth when they are so awash in easy money that they can beat their earnings guidance with a risk-free stock buyback? – Gradually and Then Suddenly (Jul17), Epsilon Theory

Image: Visual Capitalist. I suggest viewing this infographic if you’re less familiar with the implications of buybacks

This is the consequence of excessive quantitative easing and monetary policy on steroids.

What’s the motive behind this? Answer: the US political system is based on the stock market going up. Donald Trump and Steven Mnuchin (US Secretary of the Treasury) look at the indices as their report card. If stocks don’t go up, pension funds and social insurance programs go bust, further amplifying pre-existing inequalities. 

The capital markets have already transformed into a political utility. The market knows this.The markets have been living off this narrative. Everyone knows it’s an unsustainable system. But everyone also knows that everyone knows that it’s going to keep on going. Until it can’t. 

There are techniques to literally visualize what the crowd is thinking by scraping key words from financial journal articles.

Image: Epsilon Theory, The Narrative Giveth and The Narrative Taketh Away (Apr18)

These visualizations reveal the formation of common knowledge around the inflation narrative. Everyone knows that everyone knows that this can’t just go on.

In the Euro zone, there’s a whole another complication. The European Central Bank (ECB) doesn’t have fiscal policy levers. And Germany, which basically controls EU finance, is obsessed with keeping inflation down. When the ECB can increase money supply but not enforce budgets of each European state, the problems are a whole new beast.


3.4. COVID-19 a missionary statement?

And then shit hit the fan. A Black Swan event. COVID-19.

Image: CNBC

Indeed, there’s direct economic damages from COVID-19: entire industries being shut down, direct deaths of the labour force, productivity losses etc.

But COVID-19 was the final straw that broke the camel’s back. A big straw, but certainly not the root cause. 

Could COVID-19 be considered as a ‘missionary statement?’ Like the missionary that visits the green-eyed tribe island and announces someone has blue eyes. Or the boy that calls out the naked emperor?

Is the market now ripe for a re-evaluation of inflation and its impact on the price of money, and the real return on invested capital?

The core dynamic of the Common Knowledge Game is this: how does private knowledge become — not public knowledge — but common knowledge? Common knowledge is something that we all believe everyone else believes. Common knowledge is usually public knowledge, but it doesn’t have to be. It may still be private information, locked inside our own heads. But so long as we believe that everyone else believes this trapped piece of private information, that’s enough for it to become common knowledge.

The reason this dynamic — the transformation of private knowledge into common knowledge — is so important is that the rational behavior of individuals does not change on the basis of private knowledge, no matter how pervasive it might be. Even if everyone in the world believes a certain piece of private information, so long as it stays private — or even if it becomes public information — no one will alter their behavior. Behavior changes ONLY when we believe that everyone else believes the information. THAT’S what changes behavior. And when that transition to common knowledge happens, behavior changes fast. …

My pick for the big idea that gets taken down? The idea that inflation is dead. We all know it’s not true. We all know in our own heads that everything is more expensive today, from rent to transportation to food to iPhones. But it’s not common knowledge. Not yet. – Harvey Weinstein and the Common Knowledge Game (Nov17), Epsilon Theory

We’ll find out over the next 6-18 months.


4. Wrapping up

Only a sucker says they’re not a sucker. The message here is not to declare common knowledge as a trap to avoid. Rather, it’s a phenomenon that will emerge again and again, so be able to recognize it. And more importantly, be able to recognize its effect, including the magnitude of this effect. 

Common knowledge in itself is not good or bad. It just is. Even with pluralistic ignorance, there are cases when this could be good too. Overlaying a moral compass is something separate to common knowledge. Meanwhile, there are times when we must be the boy that calls out the emperor without clothes.

Become someone that questions things. Become the 13-year old that kid that is not afraid to declare, “Guys I actually don’t like the taste of beer. Do you?”

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