Remember that an allusion is a reference to a person, place, thing, or idea. This reference must have certain cultural importance in order to be understanded by someone else. If not, your reference won't have any sense.
In this case as Joe was lying, his buddy Carl made a reference to the popular novel "The Adventures of Pinocchio" or the Disney movie "Pinocchio". In this story, the main character is a puppet that comes to life after his creator wishes for it. One of the main peculiarities of the living puppet is that when he lies, his nose starts growing, as a result everyone can see when he lies. So Carl is telling Joe to stop lying, he knows that the fish he caugth is not that big.