John Vachon Watchers October 1938 Cincinnati, Ohio. “Watching the sesquicentennial parade go by”
In the fields of economics and logic, there are basically two types of knowledge that can be communicated between people. The first one is usually through the use of indirect speech:
1) Individual Knowledge – X knows fact A and Y knows fact A, but neither necessarily know anything about the state of each others' knowledge.
e.g., X asks her dinner date, Y, if he would like to come upstairs to her apartment for a drink. Y is pretty sure he knows what’s really going on, but he doesn’t feel like having a drink and it’s possible that X is just being nice. X is pretty sure Y gets it, but it’s possible that Y is taking her offer at face value. The only thing they both know for sure is that X asked Y if he wanted to come up for a drink!
The second type is typically communicated through the use of very direct language:
2) Mutual Knowledge – X knows A, Y knows A, X knows that Y knows A and Y knows that X knows A (and X knows that Y knows X knows A, etc., etc.)
Mutual knowledge obviously has a huge influence on collective psychology and behavior in complex human systems, depending on the time and place in which this knowledge exerts itself. The Santa Fe Institute for Complexity Studies has recently made availble a video lecture by Alex Bentley, who has scientifically studied the role of “social influence and drift” in collective behavior. I highly recommend readers take a look at Bentley's lecture, which can be found here, but a brief summary will also suffice for the purposes of this article.
“Many explanations of human behavior – even among the 'social' sciences – start with people as isolated individuals, maximizing benefits versus costs. Panics or 'herding' events are often seen as anomalous departures from this norm. I would like to suggest that humans, whose very brains have evolved to handle social relations, are 'herding' much more often than commonly assumed
For a variety of modern phenomena,simple evolutionary models of social influence – or even just random copying – do remarkably well at capturing the large-scale dynamics of popular culture change
Such models offer an explanation for the often unpredictable flux of collective trends, especially in a modern society of unprecedented amount of choice and 'decision fatigue'. By then comparing to traditional societies, where both individual choice and social influence are often better informed, we can better understand how population scale data inform us about human decision-making and the dynamics of behavior change.”
In the modern world of capital markets, this type of social influence and imitation provides the basis for mutual knowledge that can endogenously drive share prices higher or lower, as opposed to independent knowledge of a company’s “fundamentals” being the most significant factor in investment decisions.
e.g., Big-time Trader X tells big-time Trader Y that he and a few other big-time traders are fully invested in a certain stock with vast amounts of leverage, and big-time Trader Y imitates the leveraged investment.
So, while mutual knowledge can be a force that helps blow speculative bubbles amongst the herd, it can also be a force that incites mass resistance to oppression or even some form of revolution. Take the parable of The Emperor’s New Clothes by Hans Christian Andersen, for example. In that story, the child who pointed out that The Emperor “isn’t wearing anything at all” was not telling anyone a fact that they didn't already know.