Blog | Economics

A Short Note On Signalling

. 2 min read

In economics, signalling refers to the idea that one party credibly conveys some information about itself to another party. For example, in Michael Spence's job-market signalling model, job applicants send a signal about their ability level to a prospective employer by listing their diplomas and employment history. In evolutionary biology signalling has a more general meaning. It is this general meaning that has interesting implications for economics.

The central idea is that various phenotypic traits serve as signals to others. These traits were shaped by evolutionary processes and helped individual organisms to survive or reproduce. Ultimately this served the adaptive goal of spreading the organism's own genes.

One branch of the theory, fitness indicator theory, claims that some traits serve as signals, or honest signals to be precise, of an individual's physical and/or psychological fitness, which in turn may reflect "good genes". These traits may give the individual an edge in finding a mate or fending off predators. The classic example of a fitness indicator is the peacock's tail.

In his book The Mating Mind Geoffrey Miller argued that various forms of human behaviour such as dancing, sports, using difficult words such as phenotypic traits and cultural artefacts such as fashion and jewellery can also be interpreted as fitness indicators in this sense. You don't need a lot of imagination to extend it to other fields. In a recent book, Spent. Sex, evolution and the secrets of consumerism Miller applied the same ideas to economics and marketing.

A problem with signalling theory and much of evolutionary psychology is that it explains too much. Once you've got the idea you can make up a fancy story to explain almost anything. One person may buy something to signal wealth, another person may not buy it to signal that he stands above displays of wealth (think Steve Jobs, Bill Gates, Serge Brin etc. vs all those "poor" investment bankers). This is why I didn't read Spent yet, because after reading The Mating Mind and browsing through it in a bookstore I was like, I got the point already.

Some of the questions one may ask from a signalling point of view are:

Am I buying this because I need it, because I derive some utility or pleasure from it, or am I buying it to signal something to others?

Am I doing this because I want to or because I'm signalling something?

Am I making this comment, writing this remark because I want to share something or because I want to show off my erudition?

Am I asking this question because I'm genuinely interested in knowing the answer or again to show that I'm clever?

There is also another side to the signalling equation, because others may assume that you are signalling, whether you are doing so or not. I may wear certain clothes because I like the design or because I'm too busy with other things, but another person may interpret it as a sign of extraversion or introversion.

I should emphasize that there is nothing wrong with signalling. Once you realize that the main reason you're buying or doing something may be signalling, you may find better ways of signalling whatever you want to signal.

Miller, G. F., & Todd, P. M. (1998). Mate choice turns cognitive. Trends in Cognitive Sciences 2 (5), 190-98.