[Music]

and and this starts to become uh

important uh in he's not just trying to

meet people in in London or or New York

in Shelling's original game. By the way,

you said there are two options in a

coordination game. I mean that in a in a

classical coordination game, sure, but

there could be any number. Yes. Um as

this is the problem with London, any

number of places and any number of

times. Um, and

even though there are only limited

number of plausible places,

there might easily be 20 plausible

places. And you know, Leicester Square,

Trafalga Square, St. Paul's Cathedral.

>> I I asked Pen Vogler, who's a the

publicist at Penguin Books, who's been

accompanying me to many of these events

because I wanted a London equivalent of

the uh clock in in Grand Central Station

in New York for for a London audience.

She suggested Nelson's column in

Trfalgar Square, which is another is a

which is which is also good. By the way,

I should add since I'm I'm with an

economist, but I consulted some of my

economist game theorist call colleagues

at Harvard. I said, isn't this great?

I'm going to be publicizing game theory

and and and e economic analysis. He

said, 'Well,

he said, 'You should know that some game

theorists are rather annoyed at

Shelling's examples because Shelling's

point is there's a point at which game

theory cannot tell you what the uh how

to get into the equilibrium. There's

more than one that drives game theorists

crazy because the answer comes from

psychology. And and Shelling was very

explicit about this. He said whimsy,

humor, puns, history, accidents, all of

these can be solutions to what otherwise

would seem like a cut and dried problem

in mathematics.

>> But I mean, Shelling was Shelling was

right. He was I mean that's why he was

the greatest game theorist who ever

lived. He's amazing. Did you did you

ever get the chance to meet him?

>> I met him once. Yes. and and u c can I

give another anecdote from shelling

because it just it does show off his

brilliance both as a theoretician but

also as a as a intuitive psychologist as

a human being very savvy about how

people interact. This also speaks to the

question of is there any how many levels

of I know that he knows can you go and

is there really a qualitative difference

between common knowledge which at least

implies an infinite number and say three

or four levels. Isn't three or four

levels good enough? So he recounts an

example where he's on a car trip with a

colleague and the colleague is engaging

in one of AC acade academics's favorite

pastimes which is complaining about the

unfairness of an anonymous peer review.

So you you um so this this his his

friend is fuming about this idiot, this

who gave him this totally unfair

review. Then Shelling realizes he

himself was the one who wrote that

review is you know double blind review.

Um, and then you what to do? And

especially since it occurs to him, you

know, now that he's with me in the car,

uh, it might occur to him that I'm the

author of this review, especially since

he's recounting it to me, you know, with

me right next to him. Um,

if I were to confess, that would be

deeply embarrassing. I would have, you

know, betrayed a friend, stabbed a

friend in the back. um if he were to

confront me again it would be highly

awkward. Notice by the way that

awkwardness which has come up in several

of our scenarios in the uh the the uh

sexual uh proposition in the bribing the

major D. Awkwardness is the emotion that

we feel when uh excuse me um one um

social relationship say friendship or

hierarchy um is an occasion for us to um

behave in a way that's appropriate for

some completely different relationship

type. So challenging um uh treating a

matraee who is the master of his uh

domain as if he was a mere salesperson

or treating a platonic friend as a a a

sexual partner that gives rise to the

emotion of awkwardness. So back to this

case the relationship of communal

friendship clashes with one of them

passing judgment on the other and uh it

could lead to awkwardness. But Shelley

notes that he might even, let's say, he

figures out that it was me. Uh, he might

choose to um

to um pretend that he still doesn't know

as he goes through his dialogue. He

might even not only know that it's me,

but he's savvy enough to figure out that

I might know that he knows, but as long

as neither of us mentions it, we are

spared the awkwardness. He said, "As

long as there's no common knowledge,

which would happen if Shelling had

confessed, if the other one had accused

him, that changes the dynamics of the

social social situation qualitatively

and um and it is the difference between

as many levels of embedded knowledge as

you want and common knowledge because

each one could have like Vzini and and

and Wesley even think, well, he must

know that I know that he knows that I

know." But again, as long as they can

think that all they want, as long as

they don't blurt it out, they can

maintain the friendship.

>> He he was really a remarkable man. I

would say Shelling is probably the

reason why I became an economist reading

reading Shelling's

>> uh books. Shelling was a was a game

theorist who ended up reasoning about

everything from um how to convince

yourself to quit smoking. uh he did

early complexity science modeling and he

and he also is the reason why there's a

there's a red telephone between um

Moscow and uh and Washington DC sort of

realized it might be a a good idea to

set up a way of establishing common

knowledge in a crisis and and also

thought through it's not totally

straightforward because when you get a

call on that phone how do you know how

do you know who was on the other end so

he really thought through those

processes he

>> he won a Nobel Prize in in econ

economics. So I guess it could have been

a Nobel Prize in peace uh for that

reason. Yeah.

>> And some of his some of the logic of

threat deterrence uh was played out for

wicked laughs in Doctor Strange Love.

>> Yes. Which which he was he was I think

involved at an early stage in uh I think

Kubri Kubri looked him up but yes

>> he has the most mortant common knowledge

joke in the history of cinema. Forget

Seinfeld, forget The Princess Bride. But

the I guess it won't be a spoiler alert,

I assume. Well, maybe I shouldn't

assume, but the um the plot hinges on uh

an infernal device that the Soviets have

invented called the It's set, of course,

in the midst of the Cold War, called the

Doomsday Machine. This is a network of

um buried nuclear weapons that would go

off if the Soviet Union was attacked. so

many that it would spread fatal

radioactivity through the atmosphere and

just lead to the the end of all life on

Earth. The I mean that sounds like a

crazy thing but uh because it is so

terrible it is the ultimate deterrent.

It was the ultimate security for the

Soviet Union uh never to be attacked by

the United States knowing that the

doomsday machine would go off and it

would go off automatically. So that it

was impossible and this is where Sheling

comes in. the Soviet um uh premere

couldn't have second thoughts when an

attack was underway, thinking, well um

it would be crazy to kill every human uh

now that the attack has been launched,

so I'm actually not going to activate

the machine. Well, then the problem is

that the Americans could anticipate that

and therefore attack with impunity.

That's why it's set off to go

automatically. But the kink in the plot

is that before the doomsday machine was

announced, a rogue American general, for

cockamame reasons, decides to drop a

bomb on the Soviet Union, which

>> because they were stealing our precious

bodily fluids,

>> our precious bodily fluids, yet another

twist. Um, and in in one of the the the

the blackest of black humor episodes, as

the brilliant Dr. Strange Love is uh

conferring with the American president

and the Soviet ambassador and this might

have come out of shelling said uh this

is you know this is ingenious but the

whole point of the doomsday machine is

lost if you keep it a secret that is if

it's not common knowledge

uh why didn't you tell the world and the

ambassador says the premier was going to

announce it at the party congresses on

Monday as you know the premier loves

surprises

uh fish because the grim, you know,

insane logic of the doomsday machine or

any threat has to be common knowledge

for it to be effective. And the joke

there is that in that weekend in which

it wasn't common knowledge, uh, the

world would end.

We have questions. They have come in via

slider. Is there a I thought you see you

can all see that there's just a there's

just a vague placeholder slide up there

but I had thought that there was a QR

code for Slido. Anyway, maybe you could

put the QR code for Slido back up. There

are questions if you want to send more

questions in. Actually, I had a I had a

question about Slido. So, Slido is this

app where you can you can log in and you

can send questions and they appear here.

Apparently, anybody who's looking at the

Slido

web page for this event can see all the

questions that everyone else has has

asked. So, it generates a kind of common

knowledge about what questions have been

asked. Um, and I'm want I wanted to ask

you to reflect on that as a design

decision. Is it better that everybody

sees everybody else's questions or is it

better if the questions are anonymous? I

think it would be better if they were uh

anonymous because um it's not exactly

the same, but it's reminiscent and and

and and since you're an economist, it's

relevant to bring up an idea from John

Maynard Kanes um in which he tried to

explain speculative investing when

people buy some security not because of

its fundamentals, its productive value

like a company builds a factory, they

turn out products, they sell the

products at a profit, you buy a share,

you get some fraction of that profit.

But speculative investing where you buy

something because you think that

tomorrow other people will think that

it's worth more than what you paid for

today. And they think that because the

day after tomorrow they think that even

still other people will think it's worth

more. So he compared it to a beauty

contest. He claimed that it ran in the

British papers of the day. Although it's

not clear that there ever was such a

beauty contest where the object is not

to pick the prettiest face, but to pick

the face that the most other contestants

pick knowing that the other contestants

are picking the face with the same kind

of anticipation. Everyone is trying to

predict what everyone else will predict

that everyone else will predict. and sh

is actually shelling took it up that

very situation and suggested that it the

only solution to that is a a focal point

something that pops out. Um and and the

the prediction is that if say one of the

faces was u say a red head and the all

the others were brunettes that would be

be the way to win a such a beauty

contest. Anyway, it's called the

Keynesian beauty contest in his honor.

And it's often applied to uh runaway

economic phenomena, speculative bubbles,

irrational exuberance, buying crypto be

not because you think crypto is uh

solves any problem, but because you

think other people will buy crypto

because they think that other people

will buy crypto. Or it's inverse, the

burst bubble, the bank run, the

speculative attack where if people say

if word gets out that people are nervous

about the solveny of a bank, people will

frantically try to withdraw their

savings while there's still savings to

withdraw uh out of fear that other

people fear that still other people's

fear that still other people fear that

the bank may be insolvent. And so it can

actually make the bank insolvent even if

the bank was perfectly sound based on

the uh a public signal a common

knowledge generator that something might

might be wrong. So the question is in

this case by the way one other

application of that is bestsellers top

40 uh radio hits

um there's reason to think that because

a Keynesian beauty contest can give rise

to kind of nonlinear vicious circle a

positive feedback loop things that are

popular become more popular that

sometimes what gets on the bestseller

list can be baffling publishers rack

their brains trying to figure out what

makes for a bestseller. And sometimes it

could be uh capricious that for whatever

reason something becomes a little bit

popular. If people know that it's

popular, they say, "Well, I'm going to

buy that cuz it's popular," making it

still more popular. And so you can get

rather um capricious choices as to what

makes a best loan and what doesn't. So,

in this cont context, um it's possible

that if people were to I don't know if

they if you can upvote a question.

>> Yeah, you can upvote. I'm ignoring them,

don't worry. But, uh you can upvote,

>> but for whatever reason, if one of the

questions gets a little more popular

than the others, people might pile on

even if it wasn't a particularly good

question.

>> It's because it's it's being shown to

people first and therefore they they

have the the the ability to judge it. We

we should um I do I do have questions.

We should get to that. Yes. But but

before we do, there is this amazing um

little uh nugget in the book about Super

Bowl advertising and the kind and

specifically so the the it's this the

idea that I don't know 100 million

people watch the Super Bowl. I don't

know what the number is, but you could

pay to reach 100 million people by

advertising on lots of websites or by

advertising on lots and lots of TV

shows. Or you could pay to reach 100

million people with one Super Bowl ad.

And and there's a theory that there's a

particular kind of product that would

want the Super Bowl ad rather than even

if it's more expensive, rather than

reaching 100 million people by showing

the same ad to 100 million people um

through all these different channels. So

So

>> yes. So this is this I owe to a

political scientist named Michael Chu

that um uh who analyzed Super Bowl ads

and he noted that the most expensive ad

in the history of television was the ad

that introduced the Macintosh computer

in 1984. It ran only once. The Apple

hired Ridley Scott, the famed director

of Alien and Bladeunner to uh to to

conceive it and and direct the ad. It

did not mention the Macintosh computer

even though it was a revolutionary

product in its time. At that time

everyone used IBM PCs which had um 80

rows of 24 characters or is it 20 24

rows of 80 characters and you had to

memorize uh arcane alpha numeric strings

to use it. The Macintosh was you know

insanely great. It had windows and icons

and a menus and a pointing device, but

the ad did not mention that. It simply

had a um it capitalized on the fact that

the year was 1984 as in the the uh

Orwell novel and it had a woman in a um

red shorts and an athletics singlet

burst into a grim corporate meeting hurl

a mallet at the screen. It just exploded

in a fireball and the crawl said on

January 25th, Apple will introduce the

Macintosh and you'll see why 1984 won't

be like 1984. So like what's the deal?

Why would they spend so much on an ad

that doesn't mention the product? Well,

what they had to sell was not just the

product, but common knowledge of the

product because no one would buy this

revolutionary new technology if they

thought there weren't enough other

people buying it so that the price would

come down. There'd be uh user groups,

there'd be software, there'd be

peripherals. So, Apple had to uh

convince people that they wouldn't be

the only one. and a Super Bowl that

everyone was watching knowing that

everyone else was watching it would be

the way to generate that common

knowledge in an instant. And showed that

advertisers were willing to pay more per

eyeball for events like the Super Bowl

that are sort of like shelling points

and that they pop out. People know that

other people uh are paying attention to

it. So other products that depend on

network effects like a new credit card

which is useless if no store will accept

it but no store will accept it unless

they think a lot of customers have it.

So the discover card was announced on

the Super Bowl. The first jobseeking

website was announced on the Super Bowl.

Plus products that depend on on brand

loyalty where you wear them in public.

You have to know that other people are

aware of it. And uh so the the Super

Bowl as a common knowledge generator is

the preferred medium for that kind of

product.