Steven Pinker on Speculation Bubbles, Super Bowl Ads, and What Leaders Need to Know About Group Psychology

ADI IGNATIUS: I’m Adi Ignatius.

ALISON BEARD: I’m Alison Beard, and this is the HBR IdeaCast.

ADI IGNATIUS: All right. So Alison, the more I think about leadership, the more I think that leading effectively is almost all about psychology.

ALISON BEARD: Yeah, I can see what you mean. You need to understand consumers’ wants and needs, your employees’ wants and needs, your business partner’s wants and needs. Really anticipating everything that stakeholders might do or think.

ADI IGNATIUS: Yeah, exactly. I think successful leaders need to think on multiple levels, both to cope with the complexity of their jobs and to outthink their competition. So our guest today, Steven Pinker, is all about the power of knowledge. Understanding what we know, what we don’t know, and most importantly, whether or not others know what we know. So I know that sounds very Donald Rumsfeldian, but there is power in understanding all of this.

ALISON BEARD: Yeah, it does sound very meta, but Pinker is an expert in explaining very complex topics in a way that feels understandable and applicable to our everyday lives. So I’m interested to hear what he has to say.

ADI IGNATIUS: Absolutely. So Pinker is a professor of psychology at Harvard University, author of the new book, When Everyone Knows That Everyone Knows: Common Knowledge and the Mysteries of Money, Power, and Everyday Life. It’s a book that helps explain everything from the power of Super Bowl ads to the rise of cryptocurrency, to the unspoken rules of how we interact in the office. Here’s our conversation.

ADI IGNATIUS: Steven, thank you for being with us today.

STEVEN PINKER: Thanks for having me.

ADI IGNATIUS: Great. So, your book is about common knowledge, what it is and how we use it and in ways that we’re aware of and in ways that we aren’t aware of. So, for the audience, what are you getting at with common knowledge and why should we care about that?

STEVEN PINKER: I’m using the term specialized sense, not to refer to conventional wisdom or something that is widely known, but to something that is known to be known. That is I know something, you know it. You know that I know it. I know that you know it. You know that I know that you know it, and so on ad infinitum. So, that’s common knowledge in the technical sense. It’s important because it’s necessary for coordination for two or more people to be on the same page to make choices that might be arbitrary, but it works for everyone as long as everyone makes the same choice.

Do you stay home on Saturday or Sunday? Do you drive on the right or drive on the left? Now for common knowledge to work, you don’t literally have to think, “I know that she knows it. I know that she knows.” Because your head starts to spin after one or two levels, and technically, common knowledge requires an infinite number of them, which can’t fit inside a single head. But we have a sense of common knowledge when something is conspicuous or self-evident or public or out there. If I see it while I see you seeing it, then I know that you know that I know that you know it.

ADI IGNATIUS: So this is the emperor has new clothes.

STEVEN PINKER: Well, I begin the book with the story of the emperor’s new clothes because there’s a sense in which it’s a story about common knowledge. When the little boy said the emperor was naked, he wasn’t telling anyone anything they didn’t already know. But he’s changed the state of their knowledge nonetheless because by blurting out what everyone could see within earshot of everyone else, at that moment, everyone knew that everyone else knew that everyone else knew that the emperor was naked.

And another point in the book is that just like driving on the right or driving on the left is a solution to a coordination problem or staying home Saturday or staying home Sunday, respecting paper currency, I suggest that our informal social relationships. Are we friends? Do I defer to you? Are we transactional partners? Are we lovers? All of those are matters of common knowledge as well. They’re coordination games and we solidify them by generating some public signal that we both see that inaugurates the relationship.

There can be forms of common belief, common misconception, common pretense where you do have assumptions about what other people are thinking and vice versa, that in some cases may not actually be a reality. In the case of a common pretense where we refer to that by saying, “We’re ignoring the elephant in the room,” the metaphor is that an elephant in the room is something you can’t ignore, but we’re pretending to ignore it. Sometimes there is a phenomenon called pluralistic ignorance or a spiral of silence. In economics, it’s sometimes called the Abilene Paradox, where no one actually believes something, but everyone thinks that everyone else believes it, but no one actually does.

ADI IGNATIUS: Is there an easy example of that?

STEVEN PINKER: Sure. It was originally studied in a fraternity where all the frat guys said privately that it’s really stupid to drink until you puke and pass out. But they said, “What can I do about it? All the other guys think it’s cool.” It turns out none of them thought it was cool, but everyone thought that everyone else thought it was cool. There’ve been many phenomena like that. It turns out that in Saudi Arabia, most of the men think that women should have the right to work and drive, but they couldn’t allow their wives to do it because they mistakenly thought that all the other men thought that it was impermissible.

ADI IGNATIUS: So I want to lead this conversation mainly into economic, financial, market areas but your book, I’d say it’s challenging in some ways. There are a lot of brain-teasers, there are a lot of prisoner’s dilemmas, things like that, but it’s also fun. I mean there are a lot of popular references, jokes, cartoons, and then examples. So, one of the things you talk about is the Keynesian beauty contest. Which – and if I get it wrong, you’ll correct me, but where a judge doesn’t simply select the contestant that he or she thinks is the most attractive, but rather is rewarded on selecting based on what he or she thinks the other judges will select, right?

STEVEN PINKER: Who are engaged in the same puzzle.

ADI IGNATIUS: In the same thing.

STEVEN PINKER: They’re guessing what everyone else will judge to be the prettiest face, which is different from the old Miss Rheingold competition where people voted on the prettiest face. In the beauty contest that Keynes hinted might have been in the newspapers in his day, this would be London in the ’20s. No one can ever actually verify whether there really was such of a contest. But it was a great example because for Keynes where he said, “Everyone is trying to out-guess other people out-guessing still other people.” He said, “That’s the way speculative investing works.”

They buy the security because they think they can sell it at a higher price to other people who think it’s underpriced, who in turn will want to sell it to still other people. Speculative bubbles, crypto perhaps being one of the most recent examples, are cases where people think that other people in the future will want to buy in, something that’s called the greater fool theory of investing that you invest because you think other people will invest because they think that still other people will invest.

The thing is, of course, bubbles can pop when the market starts to run out of the greater fools who think that it’ll continue to appreciate forever. But this can all get started when there is some public signal. In the case of the emperor’s new clothes, the boy blurting it out, or like a public ceremony or a public signal where if there is just a rumor or some reason to think that other people are getting in, that can cause other people to get in.

A couple of recent examples are meme stocks where an influencer might talk up a stock even if the fundamentals are terrible, pretty crummy. But the fact that other people know that he’s talking it up and they know that still other people are talking up means that it really can appreciate at least for a while.

Two Super Bowls ago, there were a number of high concept ads for crypto exchanges, which mentioned nothing about the advantages of crypto.

ADI IGNATIUS: I remember that. These are the Larry David ads.

STEVEN PINKER: The Larry David, the Matt Damon, where the point of the ads were everyone’s getting into crypto, don’t be left out. In fact, the punchline to the Larry David comic ad was, “Don’t be like Larry, don’t be left out.”

ADI IGNATIUS: So this sounds like a tool that people who understand the psychology could and probably do benefit from, right?

STEVEN PINKER: Yes. Getting back to marketing, I talk about an analysis by a political scientist like Michael Chwe, who is in some ways my predecessor in writing a book about common knowledge where he analyzed the most famous and most expensive ad in history. This was the 1984 ad directed by Ridley Scott of Blade Runner and Alien and Fame. It ran exactly once during the 1984 Super Bowl and it was to introduce the Apple Macintosh. It was a revolutionary new product. Unlike those of us who remember the first personal computers, remember it had a little screen with 24 lines of 80 characters and you had to type in alphanumeric commands like del, fubar, fu.bar, and they were error-prone. They were clumsy.

So, Apple’s coming out this insanely great new product with windows and menus and icons and a mouse. But they realized that no one would buy it if they thought they were the only one buying it because the price wouldn’t come down because of demand. There wouldn’t be a community of users and experts.

So, how do you break the knot and cut the knot and get people to buy something that they’ll only buy if other people are buying it? The answer is the Super Bowl is an annual right in American culture. You know that a lot of people are watching it and you know that a lot of people know that a lot of people are watching it. It is a common knowledge generator.

To break the logjam, Apple paid for this ad. It said nothing about the Apple computer, for those of you who have seen it. It played off the fact that it was January 1984, the date of George Orwell’s novel. So, it showed a grim corporate meeting where gray drones trudge into a cavernous hall and listen to drivel from a voice on the screen, intercut with scenes of a live young woman in a bright red gym shorts and a singlet carrying a mallet. She bursts into the corporate meeting, hammer throws the mallet into the screen, which explodes in a fireball revealing the crawl that says on January 25th, Apple will introduce the Macintosh and you’ll see why 1984 won’t be like 1984.

Now, the point of the ad was not to advertise the product, it didn’t say anything about the product, but to advertise the audience for the potential buyership. It generated common knowledge. I’m seeing the ad. I know lots of other companies are seeing the ad. What Chwe showed… I mean, it’s a story. How did he prove it? I mean, that’s just a sample of one. So, he looked at other products that only work if enough other people adopt it, products that depend on network effects. Monster.com was one of the first job-seeking ads. Now, why would anyone look for a job on Monster.com unless they thought that lots of employers were posting there?

Why would employers post there unless they thought a lot of job seekers were looking for jobs there? Monster.com was introduced at the Super Bowl. Another example is the Discover credit card, which was great credit card, rebates, and high limits, but didn’t matter if you were the only one who had a Discover card because no merchant would accept it and no merchant would accept it unless they thought enough people were going to carry it, introduced in the Super Bowl.

Chwe argued that it was another category aside from products that inherently depend on networks, they’re prestige goods that depend on other people that you respect also consuming that product. As far as language, sneakers are sneakers, but for some people, it matters whether they’re the person who wears Nikes or Adidas. An American beer is American beer, but for some people, like being a Bud drinker is just different from being a Coors drinker and products that are consumed in public and where the brand image is important also tend to advertise in the Super Bowl.

Crucially, what Chwe showed was not so much that advertisers willing to pay per eyeball, but they’re willing to pay a premium for venues that were common knowledge generators, where it was known that a lot of people were to watch them. They’re willing to pay more per eyeball for products that were consumed in public or that depended on network effects.

ADI IGNATIUS: So, maybe the flip side of this phenomenon is the toilet paper shortage during COVID, which was not this, not network effects, but an assumption that I know what you know that I know that you know that.

STEVEN PINKER: Well, yes. So, economist named Justin Wolfers speculated that the great COVID toilet paper shortage was like a bank run where people withdraw their money, not necessarily because they think that there’s anything wrong with the bank, but they have heard that other people think there might be something wrong on the sound. They might just have heard that other people think that might be something. That that’s not how it sounds. So, you get this reverberant doubt, and no one wants to be the last customer withdrawing at a point where the bank no longer can cover its deposits. So, people rush to the bank to withdraw their savings, which actually causes the bank to fail, which otherwise it wouldn’t.

Likewise, Wolfers suggested that there actually wasn’t a toilet paper shortage. It’s true that people were staying home. So, they were using six packs of Charmin, instead of the big jumbo rolls in their workplace. But Kimberly-Clark quickly stepped up production to meet the demand, but somehow people just know that in an emergency, people hoard toilet paper, which can cause the very shortage that leads people to hoard toilet paper. So, they did hoard toilet paper. A lot of retailers then posted signs, max three rolls per customer.

ADI IGNATIUS: That reinforced it.

STEVEN PINKER: And that ended the shortage. Not so much because people didn’t strip the shelves because they couldn’t, but they were reassured that since no one else could buy more than three rolls, there was no reason for them to panic. Again, getting back to common knowledge, how did this originate? At least according to one history, it all started with another common knowledge generator, the Tonight Show, which back in the three network era, Johnny Carson was the king of late night. He had not only a huge audience, but people knew that people were watching Johnny Carson, which is why catchphrases from the show like, “Here’s Johnny,” everyone recognized it.

So, one night, I think it was 1973, he said, “There’ve been all kinds of shortages lately.” This was an era where there were lines to get gasoline because of the Arab oil embargo and there was a meat shortage and a coffee shortage. He said, “Have you heard the latest? I read it in the papers. There’s a shortage of toilet paper.” Now it turned out it wasn’t true at the time. There was no shortage of toilet paper, but then that created a shortage of toilet paper when everyone ran out to buy it. Since then, at least according to the story, it’s hard to proof, it’s just become conventional wisdom that toilet paper becomes scarce in an emergency.

ADI IGNATIUS: All of this must be very valuable for people who are in negotiation, right? Because negotiation is always, “What is it that we both know, and what is it that only I know?” I mean that’s how you win. But yeah, talk about to what extent I know, you know… That’s the fundamental of the people who negotiate better probably understand this concept better.

STEVEN PINKER: Yeah. So, negotiation is one of a number of kinds of games in the game theory sense, meaning my best option depends on what you do and vice versa. In any time in which there can be multiple equilibria, cases where everyone is better off if they both do something, but it isn’t preordained what they’ll do. So, the negotiation is what’s sometimes called a battle of the sexes is the technical term. It has nothing actually to do with the sexes, but it refers to a hypothetical couple where they like to spend time together. He would prefer that they go to the hockey game. She would prefer they go to the opera. They’d rather go to either than not do something together. The question is, which one do they go to? Both of them are equilibria.

In the case of negotiation, let’s say a car salesman and a buyer. There’s a range of prices in which the salesman makes a profit and the customer pays what they’re willing to pay to get the car. But within that range, the highest the customer is willing to pay, the lowest the seller is willing to sell for, how do they decide? Obviously, the seller wants it as high as possible, the buyer wants it as low as possible. If either of them walks away from the deal, then they’re both worse off. So, how do they decide? So there are many predicaments in life like this where there are many ways of doing something, but both parties are better off if they can figure out some way to do it. In the case of a negotiation, it’s interesting.

This is something pointed out many years ago by the political scientist, Thomas Shelley, who won a Nobel Prize for this and other work, that often a buyer and seller in order to find somewhere, anywhere to land on that the other guy will agree with, they’ll pick something like splitting the difference or a round number. He notes that the salesman, who announced that his rock bottom price for the car is $30,007.26, is pretty much pleading to be relieved of $7.26. It’s like, “Oh, come on.” So why a round number? I mean, what’s so special about a round number? What’s special is other people can think it’s special or can expect each other to recognize it as special. So, these points, focal points, sometimes called shelling points, points that pop out in the minds of both parties and that’s all they need to come to an agreement are often where negotiations end up.

ADI IGNATIUS: When you talk about common knowledge, particularly some of the early references, it seems a different era than where we are now. Maybe this was never true, but people my age will look back and say, “Well, we used to agree on facts.” We probably didn’t altogether, but we did, right? As you say, there were only three networks that wasn’t this ubiquity of opinion and everything. Now we’re really in an era where they’re competing truths and I would assume competing common knowledges. Obviously, there’s various common knowledges between people and in relationships, but at a larger level, I guess my question is, is that eroding the common knowledge that enables social interaction, et cetera? Is that a concern for you?

STEVEN PINKER: There is that fear, although as you say and I often point out that the best explanation for the good old days is a bad memory. There’s a lot of polarization in the ’60s too, riots and terrorist bombings and assassinations and so on. Duly not romanticizing the past, there does seem to be an increase in negative polarization that is not just that people disagree, but each thinks that the other is evil. It’s plausible that one of the contributors was the fragmentation of the media markets.

So, that instead of everyone watching Walter Cronkite or Huntley and Brinkley, first with cable news, with Fox News, whose business model was to cultivate a highly partisan audience that wants to hear a certain spin on everything and with social media where the networks of posting and reposting and tweeting and retweeting and linking and relinking has been shown to take place within two or more closed networks with not much interaction between that there could be separate pools of common belief within each of these communities. Something that’s easier to happen when there isn’t one public signal, a Super Bowl, a Johnny Carson, a Walter Cronkite that everyone knows that everyone knows is aware of.

ADI IGNATIUS: Okay, so anyway, so this concept of common knowledge existing in different ways in different forms of relationships. So, within a company, if an executive, if a leader wants to create a common knowledge that he or she imagines would be beneficial for the culture of the company, is there a playbook almost for how to create a positive common knowledge within this environment?

STEVEN PINKER: Well, in general, common knowledge is generated by something that is conspicuous, public. So, face-to-face meetings can generate common knowledge in a way that, say, remote meetings don’t. That is when you’re in a room, you see everyone else, they see you, they know that they’re seeing each other and seeing the speaker or the leader. So, I think that’s one of the reasons that as with the Super Bowl, which is a broadcast version, but there is an important role for publicly conspicuous notices, sometimes pronouncements.

Going back to the economy as a whole, the reason that statements from the Fed are scrutinized and poured over like rabbis parsing the Talmud is that anything that the chairman of the Fed says can create its own reality when people knowing that other people have heard it will act on it out of anticipation of what other people will do, which can then feed on itself and create a bubble, a recession.

So, I quote Alan Greenspan, who at one point said, “Since I’ve become chair of the Fed, I’ve learned to mumble with great incoherence. If I seem clear to you, you must have misunderstood what I said.” Because a signal that, say, a recession is ahead will create that recession because companies won’t hire out of fear that they’ll have to lay off employees. Consumers won’t buy out of fear that they might lose their jobs, each of which then creates the reality of the other. So, the chairman of that has to be very, very careful as to what she or he says.

ADI IGNATIUS: Yeah. What’s interesting in all of this… You talk about politics in some ways, you talk about authoritarian politics. I lived in China and I lived in Russia and you did have the phenomenon that you described, which is everybody knows that the regime is rotten, but nobody says it because you can’t be certain if you take the streets, there’s going to be anybody else with you, even though everybody knows. Then you understand why you have to control everything because the moment you loosen up anything, it allows for this possibility of communication and understanding.

It is like that moment when Ceausescu fell in Romania and he’d controlled everything. Suddenly, there’s people shouting in the back as he’s giving a speech and some stuff’s happening. He realizes it’s over because it’s either complete control or no control.

STEVEN PINKER: In particular, since no dictator can control every last member of the population, there just isn’t enough firepower. There aren’t enough informants. As I quote the character of Gandhi in the movie by that name

ADI IGNATIUS: Ben Kingsley…

STEVEN PINKER: Who at one point tells a British colonial officer, “In the end, you’ll leave because 100,000 Englishmen simply cannot control 350 million Indians if the Indians refuse to cooperate.” He could have said, “Refuse to coordinate or are unable to coordinate.” So people can overpower a regime if they all stand up at the same time, if they all storm the palace, if they all stop work. But how can they do it if each one is afraid that he’ll be the only one?

If he stands up, he can be picked off or bundled off to prison. If everyone protests at the same time, then there’s the safety in numbers, but there’s safety in coordination. So, there has to be a way of generating the common knowledge. Now’s the time that we all stand up together. So, protest in a public square where everyone sees everyone else seeing everyone else can often do it, which is why dictators are often terrified of public protests. Or if there is a widely circulated magazine, TV show, radio show, which is why they clamp down on the media.

ADI IGNATIUS: Talk about the blank paper.

STEVEN PINKER: Oh yeah. So, there’s a joke from the Soviet Union about a man handing out leaflets in red square. Of course, the KGB arrest him. They bundle him off to police headquarters, only discover that the leaflets are blank sheets of paper, and they confront him. They demand, “What is the meaning of this?”, and he says, “What’s there to say? It’s so obvious.” So the point of the joke was he was generating common knowledge. He didn’t need to say anything because people already knew it, but they didn’t know that everyone else knew it. And in a case of life imitating a joke, Putin’s police force has arrested a number of people for carrying blank signs.

ADI IGNATIUS: Yeah, well, I wonder if it was before. So, that in China where it’s very dangerous to protest and very dangerous to dissent publicly, after the mishandling of COVID, there were famously blank paper protests.

STEVEN PINKER: Oh, interesting.

ADI IGNATIUS: Possibly inspired by the original-

STEVEN PINKER: Joke.

ADI IGNATIUS: … Soviet joke. Yeah. So, the book is fascinating and you put your finger on common knowledge and how we know what we know and how we think about certain things and how we operate. What are we supposed to do with all that?

STEVEN PINKER: Well, it’s hard to answer that question because I didn’t write it as a how-to book or as a manual or self-help. It’s a work in fundamental science and logic and philosophy with lots and lots of applications. How you work it out in a particular case often depends on the particular payoffs. What would happen if you fail to coordinate? What do you gain if you do coordinate? If there are multiple ways of coordinating, who gains, who loses? So there’s no single formula, but it is a lens with which to view the world simply because coordination is so ubiquitous in human affairs.

Any corporation, any institution, any school, any relationship, any couple, any friendship, any family, these are all people trying to coordinate and they always have to coordinate with some signal of common knowledge. They often, in order to preserve the relationship, have to keep things out of common knowledge. So, all the phenomena of politeness, euphemism, innuendo, tact, pretending not to see the elephant in the room, beating around the bush, hypocrisy, genteel hypocrisy, all of those I consider to be cases where people privately know something, but there’s some reason to keep it out of common knowledge. The reason being something in common knowledge changes the relationship.

Sometimes you don’t want to change the relationship or you don’t want to signal the wrong relationship. So, just to give a couple of examples, I mean the most common case of systematic hypocrisy is politeness. If you could pass the salt, that would be awesome. What? If you think about it, literally, it really doesn’t make a whole lot of sense. But could you pass the salt? Do you think you might pass the salt? Why do we go through those rituals? It’s because we don’t want to boss each other around. I don’t want to give you a command as if you’re the butler, assuming that we’re friends or for that matter, strangers.

ADI IGNATIUS: So benign hypocrisy or some of these protocols, they may not be direct, they may not be honest, but they’re what we need to function.

STEVEN PINKER: They’re what we need to preserve our relationships because our relationships are coordination games, which depend on common knowledge. Sometimes we don’t want to blow up a relationship. So, we avoid the common knowledge.

ADI IGNATIUS:. Steven Pinker, thank you for being on IdeaCast.

STEVEN PINKER: Thanks for having me.

ADI IGNATIUS: That was Steven Pinker, professor of psychology at Harvard University. His latest book is called “When Everyone Knows That Everyone Knows.” Next week, Alison speaks to Ranjay Gulati of Harvard Business School about the importance of courage – and how to build it.

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Thanks to our team: Senior producer Mary Dooe. Audio product manager Ian Fox. and Senior Production Specialist Rob Eckhardt. And thanks to you for listening to the HBR IdeaCast. We’ll be back with a new episode on Tuesday. I’m Alison Beard.