Surviving with limited information

A signaling theory about college, however, shows that college could increase a student’s earning capacity, even if it taught him nothing of value.[ 4 ] It’s somewhat challenging to gradu

Chapter 9: Surviving with Limited Information

to dating theory, however, we must first further study signaling

[ 1 ]Browning (1989), 353

Bring Me a Shrubbery!

When Singapore was still desperately poor, its prime minister used neatly trimmed shrubbery to attract foreign investment.[ 2 ] The prime minister ensured that the roads from the airport to the hotels were well kept and nicely groomed He did this so foreign businesspeople would think that Singaporeans were “competent, disciplined, and reliable.”[ 3 ]

The existence of sharply pruned shrubbery in a host country doesn’t usually enhance a multinational’s foreign investments The shrubbery from the airport to the hotels was highly visible to potential investors, however, and was far easier to judge than, say, Singapore’s level of corruption What makes things interesting is that the foreign

businesspeople knew that Singapore knew that they would observe the quality of the road between the airport and hotels Consequently, if Singapore couldn’t even go to the trouble of keeping up this road, it would signal that it wouldn’t make future

accommodations to foreign capital

These shrubberies were Singapore’s easily viewed cover, and as we all know, it’s pretty easy to judge a book by its cover While evaluating a book’s contents takes some time, the message of the cover can be grasped in seconds A book’s cover provides a signal

as to its contents

[ 2 ]Lee (2000), 62

[ 3 ]Ibid

Brand Names

Brand names act as covers for your products and should provide helpful signals to customers For example, when picking a movie, parents know that if they go with a Disney cartoon, their children will not be exposed to sex, but probably will see lots of violence like Bambi's mother being shot Brand names help consumers because they are easy to understand People, as well as products, can acquire brand names

Education and Signaling

College degrees can signal a job applicant’s intelligence and, consequently, separate productive from unproductive workers What’s the purpose of a college education? College might expand your mind and make you more enlightened, but I suspect that most people attend college to increase their lifetime income Why, however, does going

to college increase one’s earning capacity? The standard answer is that college teaches people useful things A signaling theory about college, however, shows that college could increase a student’s earning capacity, even if it taught him nothing of value.[ 4 ] It’s somewhat challenging to graduate from a decent college To graduate, you must first

be accepted by the school and complete all the required work Graduating from college signals to a future employer that you have a decent level of intelligence, responsibility, and diligence Imagine that you want to hire a high-quality employee You believe that students don’t really learn anything useful in college You think that college students just memorize lots of stuff and write papers on theoretical issues of no importance You do, however, believe that it’s difficult to do all of this memorization and writing Consequently, the fact that someone graduated from college signals to you that they have high

intelligence even if you believe that college did not enhance this intelligence Hopefully, students do learn a few useful things in college The point of this paragraph, however, is

to explain that even if college teaches you nothing of value, it would still be valuable to attend, for graduating from college would signal to some types of employers that you might be worth hiring

[ 4 ]Spence (1973)

Signaling and Racism

Racial stereotyping illuminates the dark side of signaling People judge books by their covers because the covers are visible and easier to grasp than the book's contents Similarly, individuals' physical characteristics are easier to evaluate than their

personalities Unfortunately, therefore, people sometimes make decisions based upon race when ignorant of a person's vastly more significant qualities

Although perhaps not moral, using race as a signal can be rational This rationality is not predicated upon genetic differences among the races Using race as a signal is rational if race is merely correlated with less visible characteristics For example, imagine that your company wants to hire a recent Malaysian college graduate You want the smartest student you can find Let's assume that Malaysian colleges discriminate against ethnic Chinese in admissions Consequently, it is harder for an ethnic Chinese than an ethnic Malay to be admitted to a Malaysian college Given this discrimination, you would expect

in Malaysia that, on average, Chinese college students are more capable than Malaysian college students If the colleges discriminate against a group, then the school must have higher standards for that group, implying that students from this group will be on average better than the rest of the college's student population

So, you want to hire a Malaysian college graduate, and you believe that on average, Chinese graduates are more capable than the Malaysian graduates How important is this racial difference? It's of absolutely no importance if you can determine each job candidate's quality You care about competence, not race If you can determine a

candidate's competence, then race becomes irrelevant If, however, competence is difficult or even costly to evaluate, then it becomes rational for you to use race as a factor when hiring, because race is correlated with competence Even if a book's cover would have no effect per se on how much pleasure you would derive from reading the book, it's still rational to base your purchase decision on the cover if it tells you

something about the contents Signaling theory shows that if colleges discriminate against some race, then employers might desire to discriminate in favor of this race Alas, the reverse also holds true

Affirmative action can harm racial groups to the extent that a college is a signal of quality Assume that high school students can be academically scored from 0 to 100 Let's say that some highly selective college admits students from race X with a score over 90 and, because of affirmative action admits students from race Y with a score over 85 Imagine that the primary benefit of attending this college is that it signals your high rank

Unfortunately, if this school's affirmative action policies are known, the signaling benefit

of attending this college will be lower for group Y than X Tragically, even members of group Y who have scores of 100 will be hurt by affirmative action, because potential employers could more easily judge their race than their intelligence or score

Signaling Fitness

Animals sometimes evolve traits that allow them to signal information For example, when a gazelle sees a cheetah, it sometimes tries to run away for fear of being eaten Often, however, the gazelle will instead jump 18 inches into the air when it notices a cheetah.[5] An explanation for this behavior is that the gazelle is signaling to the cheetah that the gazelle could easily outrun the cheetah Because the gazelle’s jump separates it from unhealthy animals, the cheetah should not waste its energies trying to kill the gazelle A cheetah can’t directly observe its potential prey’s fitness, but it can observe its acrobatics Assuming that the cheetah would have little chance of catching a gazelle that could perform such an acrobatic feat, the cheetah would be “rational” to not chase a jumping gazelle If the gazelle consumes less energy jumping than running away, then jumping is an evolutionarily sound strategy

You can use this jumping gazelle strategy to deter a potential business rival Imagine that you are currently the only seller of snow tires in Buffalo, New York Another firm starts trying to sell snow tires You know that almost none of your customers would ever switch brands You are certain that in the end, your rival would be unable to compete successfully Unfortunately, you can’t convince your rival of his doomed fate Because competing against even a feeble rival is costly, you desire a strategy that quickly causes your competitor to exit your market

Normally, when you face a new competitor, it’s optimal to increase advertising to prevent any of your customers from abandoning you What if, however, when this rival enters your market, you stop all advertising? If your rival has any chance at long-term survival, this “no advertisement” strategy would be disastrous If, however, you are confident that

no one would buy your rival’s snow tires even if you stopped advertising, then you might indeed want to stop Your rival will realize that if he can’t beat you when you weren’t even trying that hard, he has no hope of prevailing when you start advertising again Succeeding even without advertising is the equivalent of a gazelle’s jumping 18 inches in the air It’s an impressive feat that should deter would-be predators

[ 5 ]See Gintis (2000), 307–308

Warranties

Warranties and money-back guarantees act as powerful signals about your product's quality Imagine that there are two types of cars a buyer could purchase from a used car dealer: lemons and high-quality vehicles A lemon would require a lot of future repair work while a high-quality car would require little or none Assume that the dealer, but not the buyer, knows the car's quality If the seller knows that his car is of high quality, he should offer a free warranty, promising to pay all repair costs The seller of a lemon would be reluctant to offer a warranty that would impose expensive obligations upon him The buyer should thus believe that a free warranty offer signals that the car is no lemon Note that if the car is of high quality, the warranty will cost the seller nothing and provide

no benefit to the buyer once the car is purchased The warranty would still, however, serve an important function It would signal the car's quality

Signal Jamming[ 6 ]

Sometimes you want to prevent your competitor from acquiring useful information Imagine that a potential business rival test-markets his product in a few stores in your area The results of these tests will provide your rival with a signal as to whether he should enter your market When should you interfere with these tests? If you could secretly interfere, then you could always forestall competition by surreptitiously causing your rival’s test marketing to fail But what if you couldn’t interfere without your rival finding out?

Say the only way that you could mess with his test marketing would be to drastically alter your prices in the stores in which he was selling his products By randomly varying your prices, you prevent your rival from getting any useful information from his test marketing Before engaging in visible signal jamming, however, you need to determine what your rival will do in the absence of any new information Perhaps he is 90 percent sure he should enter He is just test marketing to guarantee that he is not making a mistake In this case, visible signal jamming would just ensure that he would enter What if your rival

is almost certain that he should not enter, but is test marketing to see if you are weaker than he previously thought? If he was almost certain that he shouldn’t compete, and you prevent him from acquiring any new information, will he now stay out of your market? Unfortunately, if you visibly interfere with his test marketing, your rival would necessarily gain valuable information He would learn that you are scared enough of him to go to the trouble to mess with his signal Your rival might interpret your signal jamming as a sign that you are weak, and he should enter

Signal jamming is most effective when your rival hopes to receive a multidimensional signal Let’s assume that there are many different types of products your rival could sell, but he’s not sure which to offer in your market At a significant expense, he manufactures multiple prototypes and sells each type in a separate store If you now were to signal-jam

by, say, radically lowering prices in some stores and raising them in others, you would make it very difficult for your rival to formulate an entrance strategy He wouldn’t know which prototype would sell best in your area When your rival’s decision is binary, enter

or not, it’s difficult to visibly signal-jam, for such jamming tells him that he should enter If your rival’s decision is multifaceted, then signal jamming can be very effective because while it does show your fear, it also prevents your rival from determining how to best compete against you

[ 6 ]See Dixit and Skeath (1999), 404

Valentine’s Day

Why do men give flowers to their girlfriend(s) on Valentine’s Day, and why do women who don’t receive flowers on Valentine’s Day get depressed? Flowers on Valentine’s Day signal love, and many of us are worse off for it

Women are often uncertain if any of the men in their lives are romantically interested in them Since it’s customary for men to give women whom they desire flowers on

Valentine’s Day, women who don’t receive flowers learn something They learn that it is not likely that any of their male acquaintances are romantically pursuing them

Valentine’s Day is a day of judgment for many women, and so those who don’t receive flowers sometimes feel damned

Game theory almost forces a man to give flowers to his girlfriend on Valentine’s Day Flowers, particularly roses, are expensive (especially on Valentine’s Day) Men who don’t really care about their girlfriends consequently won’t spend the money to get them flowers Could a man who did care about his girlfriend convince her that he didn’t need to buy her Valentine’s Day flowers? Yes, but this would be like a smart person convincing his employer that he is intelligent even if he didn’t graduate from college Recall that graduating from college separates a smart from an unintelligent person, because only the smart person can go to college Thus, if almost every smart person goes to college, it would be extremely unlikely that someone who didn’t graduate is still intelligent

Similarly, if almost all men buy flowers for their girlfriends whom they still care about, then most women will believe that not getting flowers signals their boyfriend’s disinterest Men are thus in a trap, for we are actually made worse off by not giving flowers Men who (a) don’t care about their girlfriends and (b) don’t buy their girlfriends flowers have

an incentive to lie and pretend that they still do care about their girlfriends Consequently, it’s difficult for men who care but don’t buy flowers to convince their girlfriends of their devotion Furthermore, if a woman knows that her boyfriend knows that she would be upset if she didn’t get flowers, then the woman is automatically justified in getting upset if she doesn’t get them, for now her boyfriend has knowingly hurt her We are all in a horrible Valentine’s Day game theory trap with no solution but for all of us men to waste large sums of money on expensive, soon-to-wither, thorn-studded vegetation

Celebrity Endorsements

Why do some companies pay celebrities piles of money for product endorsements when the celebrities usually aren't qualified to evaluate the products? Celebrity endorsements resemble flowers on Valentine's Day: a costly method of signaling Celebrities are expensive to rent A company would be willing to spend lots of money only on a product

it was devoted to Consequently, a celebrity endorsement signals commitment

Sexual Information Strategies

Success in the dating market comes not from mastering fashion or foreplay, but from managing information Attracting a mate is like selling a used car: In both cases you want

to play hard to get Buying a used car is somewhat of a mystery You can't be completely sure of the car's quality when you purchase it The buyer has a lot more information about what's under the hood than you do Since in some situations it's highly

inappropriate to check under the hood before taking a drive, buyers must often rely upon signals to assess the car's quality

If a buyer was extremely eager to sell you his car, you should wonder why The worse the car's quality, the greater the buyer's desire to sell it If I offer to sell you my 1994 Honda Civic for $500, you won't think I am offering you a great bargain You'll question what information I have about the car's condition that causes me to be so desperate to part with it What mechanical dysfunction am I hiding?

People should play hard to get in the dating market to avoid transmitting negative information If you express an extreme desire to date someone, she may question why you can't do better than her If Debbie is an 8, and the best that I can do if she rejects me

is to date a 4, then I would obviously be very eager to date her The marginal value added I would receive from interacting with her would be high But if Debbie ever finds this out, she would realize how much better she could do than to date me The strategy I should adopt is to convince Debbie that while I normally date 9s, I would be willing to make an exception with her Ideally, I want Debbie to think that I would barely consider dating her

Of course, if Debbie is a 10, then none of this applies Anyone would be eager to date a

10 Expressing intense interest in dating someone who could be on Baywatch signals that you're normal, not desperate Therefore, when going after supermodel types, feel free to honestly express your desires, but be coy when pursuing ordinary mortals Unfortunately, if you have a justifiably low opinion about yourself, the economics of dating might dictate that you not date anyone who is interested in you If you don't have any traits that a reasonably decent person would admire, you might want to avoid people who would consider becoming romantically involved with you Yes, I realize this means a life of lonely desperation

I have been told that single women sometimes pretend not to recognize available men whom they have previously met This is a brilliant strategy, for it signals that they have so many options that they need not keep track of them all Their feigned ignorance will impress not only the men they pretend not to know, but also people who find out about their deed Obviously, the better-looking the men they pretend not to know, the higher opinion people will have of them

Many people pursue someone, only to lose interest after the 'capture.' This is often thought to be the result of some deep psychological flaw We want something just because we can't have it Or worse, we don't really want sex or romance, so we run away when these things become obtainable However, it's entirely rational to lose interest in someone who responds favorably to your advances Your estimate of a potential mate should go down after you find out they like you After all, this means they can't do better than you If they're too eager to accept, then perhaps you should look elsewhere

For some people (mostly women) romantic success is achieved more by dating

someone who has a great personality than who is gorgeous Let's say you want to attract

a person who does care more about personality than appearance What would be better

to do: take bodybuilding classes or go to therapy to work on your personality?

Is it more important for restaurants to have clean kitchens or clean bathrooms?

Obviously, since the patrons see only the bathrooms, it is far more important that they be kept clean Even if most of a restaurant's customers would rather dine in a place with a clean kitchen than a clean bathroom, restaurant owners should still pay more attention to