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Suppose I go on an online dating site and send a message saying, “You have the most attractive and interesting profile of anyone I’ve seen on this site in the last year.” That’s cheap talk. I could say that to everyone I message. The person who gets this kind of message has no reason to believe me. I need to find a way to prove it -- to put my money where my mouth is, as it were.
By offering participants two free virtual roses, a Korean online dating website did just this kind of promotion. Getting a rose like that would tell me that the person who sent it had chosen me over all the other profiles (or at least all but one!) and make me more likely to respond favorably. But note that what makes the signal work in this case is that it costs something. Participants have to give up something important -- the ability to show special interest in others -- when they use the virtual rose. That’s the key to signaling, and it’s what elevates talk from cheap to credible.
Signals become meaningful only if they are costly.
And then there’s the anti-signal. Like Valentine’s Day auto-rituals. And birthday wishes on Facebook.
#### Paul Oyer
##### About
Paul Oyer is The Fred H. Merrill Professor of Economics at the Stanford Graduate School of Business, Research Associate with the National Bureau of Economics, and the Editor-in-Chief of the *Journal of Labor Economics*. Before that, he was on the faculty of the Kellogg School at Northwestern University; consulted at Booz, Allen, and Hamilton; and worked at 3Com Corporation and ASK Computer Systems. With bachelor's degrees in math and computer science, Oyer holds an MBA from Yale and PhD in economics from Princeton.
In the old days, keeping track of your friends’ birthdays and sending them birthday wishes even over email took some effort. But Facebook ruined that. I used to get a weekly e-mail telling me which of my Facebook friends had a birthday that week. Now my iPhone lists these birthdays on my daily calendar. When I see it’s someone’s birthday, I can quickly get on Facebook and write “Happy Birthday” or similar on his or her wall.
The same is true of sending Valentine’s Day e-cards to even just one person: it doesn’t cost us anything.
I hate to be anachronistic, but I don’t like this new system. Knowing that someone spent an average of 15 seconds wishing me a happy Valentine’s Day takes all the fun out of it. As for birthdays, more than one person has put a birthday wish on my Facebook page consisting of “hb.”
Two lowercase letters!
* * *
When Stanford economist Michael Spence originally explained the idea of signaling, online dating had not yet been invented and he had to think of another way to convey the concept: education.
He imagined a world where colleges serve no productive use whatsoever, existing only so prospective employers can figure out which people they want. Assume in this scenario that there are exactly two types of people in the world: those who are talented and those who are innately unskilled. How can employers figure out who’s who? The talented people can prove their skill level by graduating from college. They may learn nothing useful in college, but they show employers that they are talented and, as a result, they are eligible for higher-level jobs.
But this system will work only under two important conditions: It must be that only the talented people can make it through college; and it has to be the case that a college degree is actually a useful indicator of the person’s talent in the job market. (If only some people can get through college, but those people are not necessarily the ones who will be good employees, then the system breaks down.)
Others who have made use of signaling to make sure they made the right choice include immigration control (as shared by David Sedaris about his experience renewing visas: “The government hopes to weed out the lazy”) and employers such as Google that get overwhelmed by job applicants. And some firms use advertising as a signaling device to separate themselves from inferior products.
In fact, much advertising conveys literally no information about a product; we often don’t even know what the ad is for at first. But one way to look at this practice is that the firms are, in essence, saying, “We have a great product and we are going to waste a lot of money bringing that fact to your attention. But we know this will pay off because, since our product is so great, we know you will keep using it and make our investment pay off.” (Those advertising an inferior product could get people to try the product, true, but negative word of mouth would discourage repeat business and future shoppers.)
So advertising is signaling. It wastes money, but the value of the signal is higher for the better products and firms. (This also only works for companies that expect their customers to have a long-term relationship with the product.)
Burning a lot of money turns out to be a great way to back up cheap talk -- for its signaling value. The Joker burns a big pile of money in The Dark Knight to prove to his mafia co-conspirators that his goals are broader than just making money. This obviously wouldn’t work in real life.
Someone spending a lot of money on a Valentine’s Day date, however, would work as a signal.
A key insight from economics is that there will be times when it makes sense to waste time, money, or effort to signal that you have some valuable or useful quality. But don’t invest in a signal unless you are sure that the people who don’t have that quality can’t or won’t go through the trouble of sending the same signal.
__Adapted and excerpted from __Everything I Ever Needed to Know About Economics I Learned from Online Dating*__ by Paul Oyer. Copyright 2014. __Reprinted by permission of Harvard Business Review Press. *All rights reserved.
Wired Opinion Editor: Sonal Chokshi @smc90
