An event is considered common knowledge among a group of agents when each player knows the information, each player knows that the other one knows it, and so on. Common knowledge is the limit of a potentially infinite chain of reasoning about knowledge. In this scene from Dodgeball, White Goodman (Ben Stiller) is trying to assert that common knowledge exists between himself and Pete LaFleur (Vince Vaughn).
Warning: this scene does contain explicit language
In this scene, Beard and Roy are trying to decide how to use their new star player in a match against a former coach from their team, who is familiar with their tactics and players. This creates a common knowledge problem because both Beard and Roy need to make a decision based on what they think the other person knows, what they think the other person thinks they know, and so on.
The problem is that neither Beard nor Roy can be certain about what Nate is thinking or planning, and this uncertainty can make it difficult to make the best decision for the team. In other words, they need to have common knowledge of each other’s intentions and strategies in order to make an informed decision. This common knowledge problem is an example of how information asymmetry can create challenges in decision-making.
This song is about a girl in emotional pain following a breakup. Rod Wave watches her dancing and pretending she’s fine, but he can see she’s hurt behind her makeup, her look, and her attitude. He recognizes someone hiding their feelings because he’s one of them: he had a story of pain as well, and hiding feelings is something he knows very well.
The video can be a good segue into a conversation about sunk costs. The time we spend thinking about past romances doesn’t allow us to move on to better things. The past is sunk and can’t be recovered, so it shouldn’t be factored into how we make decisions. Unfortunately, that’s easier said than done.
Thanks to Brad Scott for the recommendation!
During the final local league soccer game, the starting goalkeeper is seriously injured and the backup (Fernando) must enter the game to face a final-minute penalty kick. Before the shot can be taken, the crowd storms the field and the referee decides to postpone the kick to one week later. The problem? Fernando has all week to think about where the shooter will kick.
In this scene, the team works through the penalty kick scenario. The options available to the kicker are common knowledge among the team. The team knows the kicker prefers to kick right, so the kicker may kick left instead. But the kicker knows that the team knows that and may kick right after all. The team gets frustrated because they soon realize there is a potentially infinite chain of reasoning about what everyone knows.
Bullet Train is an American action comedy that pits various killers against each other while riding a bullet train. In this scene, Lemon has tracked down two people (Prince and Kimura) and needs information. Instead of torturing the two of them, he opts instead to place them in a classic prisoner’s dilemma. He hopes that the two will be self-interested and reveal the outcome he desires.
Prince and Kimura are asked to close their eyes and either confess or rat the other person out. Lemon reminds them that cooperation (both raising hands or both pointing at each other) is likely a lie and he will kill them both. It’s a slight twist on the traditional prisoner’s dilemma played in classrooms, but it’s nice to see an application of interdependence and game theory in movies.
Thanks to Liam McDermott for the clip recommendation!
Pam and Jim are getting married, but some of their coworkers aren’t ready to give them money directly. Ryan approaches Pam and offers her the choice of $100 now or the opportunity to get $5,000 a year from now. Pam is skeptical and initially states she wants the $100. Ryan is able to eventually talk her into investing in his friend’s company.
This is a great opportunity to talk about the tradeoffs of risk and reward as well as introduce the concept of present value. If Pam accepted the $100, she may be able to turn that into $110 next year if she found an opportunity to invest at 10% interest. Ryan is offering an incredibly risky alternative that would pay off much higher. In order for people to accept that much risk, the payoff must be really large. Safer investments tend to have lower interest rates.
Thanks to Allison Anthony for the clip recommendation. You can find more economics-inspired clips from The Office on The Economics of The Office website.
While doctors are likely to be focused only on saving lives, medical insurance companies may be focused on increasing the quantity of healthcare a person receives. In this brief scene, we consider whether it’s appropriate for insurance companies to charge without consent and whether doctors may be incentivized to do more than necessary to increase earnings.
While drones provide a level of safety for US military members, they also create an incentive problem for the military. Now that it is easier (and safer) to strike foreign targets, the US uses drones to attach more targets than they would if they hadn’t been invented. This unintended consequence has resulted in thousands of civilian deaths and an increased reliance on deadly technology. This is also another example of a moral hazard in which economic agents take increasingly risky actions because they have been safeguarded against the risk.
Have you ever stepped foot in a grocery store and been immediately overwhelmed by all the choices you have about everything from chips to sodas? The paradox of choice is that we often believe having multiple options makes it easier to find the product we really want, but it turns out that having a lot of options makes it harder to figure out exactly which one we want and often leaves us unhappy with our choice.
In this scene, the Scottish army is waiting to fight the English army. William Wallace (Mel Gibson) is going to “pick a fight” and make sure that the nobles from each army don’t negotiate a peace. His fellow leaders are in charge of passing out weapons. When asked what to do they remark, “we didn’t get dressed up for nothing.”
They are falling prey to the sunk cost fallacy. Just because they’re all dressed and ready to fight doesn’t mean that is the logical thing to do. The soldiers are not using effective marginal analysis to determine whether fighting is the next best course of action.
Thanks to Luke Starkey for the clip and summary!