You're applying for jobs. Each round, you're secretly either skilled or unskilled (you can see which). You choose how to signal that to the employer: free "cheap talk" claims, or a costly signal (like a certificate) that costs you points but is more convincing.
This round, you are secretly: Skilled 🌟
Signaling games are about a very common real-world problem: one person knows something the other person doesn't. In our game, you know whether you're truly skilled or unskilled, but the employer doesn't — they only see the signal you choose to send. This kind of situation is called "information asymmetry," and it shows up constantly in life: buyers don't know if a used car is reliable, banks don't know if a borrower will repay a loan, and employers don't know if an applicant will actually be good at the job.
The trick is that not all signals are equally believable. "Cheap talk" — just saying "I'm great at this!" — costs nothing to send, so both skilled and unskilled people can say it equally easily. Because it doesn't separate the two groups, smart listeners tend to discount cheap talk heavily. A costly signal, on the other hand, is expensive or difficult enough that it only makes sense for people who actually have the quality being signaled. Economist Michael Spence famously showed this with education: getting a college degree is costly in time and effort, and it's relatively easier for someone who is naturally hardworking and capable to get one than for someone who isn't — even if the degree teaches nothing directly useful for the job. Just having survived the costly process signals something real about the person.
This is why costly signals can persist as a stable equilibrium: skilled people are willing to pay the cost because it pays off in trust and better outcomes, while unskilled people often aren't, because the cost isn't worth it for them given their lower chances of success. Over repeated interactions, employers (or observers in general) can learn to trust costly signals more than cheap talk, exactly like you may have noticed happening as you played more rounds above.
Have one person secretly flip a coin to decide if they're "trustworthy" or "not trustworthy," and let them choose to either just say "trust me" (cheap talk) or do something costly like give up a turn in a game (costly signal) to prove it. Repeat several rounds with a partner guessing which is real, and track how often each type of signal turns out to be true.
What is a signaling game?
A signaling game is a situation where one player has private information and sends a signal to another player who reacts based on that signal.
What is 'cheap talk'?
Cheap talk is a free signal, like simply claiming something — since anyone can say it, it's often not very believable.
Why are costly signals more believable?
A costly signal is expensive enough that only people who really have the underlying quality are willing to pay for it, making it credible.
Where does signaling theory get used?
It explains diplomas, peacock tails, warranties, and expensive advertising as ways of proving genuine quality or commitment.