Real-life observations of the blue eyes puzzle phenomenon?

by HonoreDB 1 min read8th Aug 201118 comments

2


The Blue Eyes Puzzle (solution) depicts a paradox: people engage in coordinated action despite having no new information, when "I know you know he knows" reaches a critical mass. Apparently the formal system invented to address this is called Common Knowledge.

Duncan Black complains:

I wonder if any serious investor could actually explain what new information "the market" has which could explain why DJIA should be worth 11% less than it was 2 weeks ago.

The typical, compelling, explanation for this sort of thing is herd behavior.  In the absence of new information, the market is modeled as a random walk, and when the amplitude of its swing happens to get high enough, people see a trend, anticipate it continuing, and thereby create the trend and cause a massive swing.

I wonder if you could instead model stock market swings, or other seemingly unmotivated coordinated activity, as common knowledge reaching critical mass.  Say new information was injected into the market two weeks ago, and it took that long to reach a blue eyes catastrophe.

I have no evidence for this other than random pattern matching.