What is... | January 30, 2014

What is signalling?

A vacancy for a job is advertised, and the employer is inundated with applications. Many look interesting but one in particular stands out – the candidate studied at a top university. This is a classic case of “signalling”.

What’s more, wrote Nobel Prize recipient Michael Spence, the candidate doesn’t even necessarily need be particularly productive – just going there sends a certain signal. And the phenomenon does not only apply to job applicants, but also to decisions about where to bank, how to invest, who to date and more.

Sending positive signals
Spence – who had developed his 2001 Prize-winning research on signalling since the 1970s – explained that signalling taps into the area of “information gaps” in markets.
In the job hunting scenario, the applicant’s top university link would send a signal to the employer, and the employer interprets the signal and adjusts their behaviour in response. And even being offered a place at a top university appears to pay dividends, Alan Krueger of Princeton University and Stacy Berg Dale of the Andrew W. Mellon Foundation writing that people who were offered a place at the best universities but attended lesser ones went on to earn the same as those who actually accepted their offers.
In fact, going to any university may function as a credible signal of an ability to learn, of a willingness to comply with authority or to adhere to orthodox views.
Likewise, professional qualifications (such as a fund manager getting a Chartered Financial Analyst (CFA), a chef getting a Masters in food safety or a designer a enrolling in an massive open online course (MOOC) taught by an industry heavyweight) can also act as a useful signal of commitment to their industry.
However, as Italian academic Massimo Giannini wrote in a working paper in 1999 the availability of education (and the cost of getting it) complicates the issue.

Sending negative signals
Of course, signalling is not always positive. And qualifications are no guarantee of getting a job. An employer could have a reason to avoid hiring university graduates – the interpretation of a signal is in the eye of the beholder – and then there’s the common conundrum for experienced workers of being seen as over-qualified.
Even something as seemingly tangential as posting photos of a crazy night out on Facebook may send a negative, “rule breaker” signal to a potential employer – or, as a Harvard Business Review blogger writes, not having a digital footprint on LinkedIn and elsewhere may be seen as suspicious or out-of-touch.

The animal kingdom does it, too
Outside the office, there’s plenty of signalling going on. Buying flashy technology or fast cars may signal sexual appeal to potential partners, as detailed by author Robert Frank in his book The Darwin Economy. Or they can do the reverse and counter-signal, blogs economist and writer Chris Dillow in his post about a premier league footballer taking his date to fast food chicken chain Nando’s.
And humans are not alone in their tendency to send signals.
In the animal kingdom, for example, peacocks and other species engage in displays of resources – signalling their attractiveness to potential partners – that are crucial to their mating strategies.

A warning signal
Signalling, then, can shape our opportunities and our choices in ways that we may sometimes not be aware of.
It might be the real estate agent who makes a good impression because of the flashy car they drive or the financial adviser who seems more trustworthy because of their expensive suit.
But it might pay to be aware of the gap between the signal and your interpretation of it.
Try to take an objective look at the situation and consider ways to fill in the “information gap”.
A strategy might be to remember what you are looking for (perhaps the right house from an estate agent and low fees from an adviser) and come up with your own test as to whether it’s been met.


eZonomics team
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