Van Gogh Wheat Fields

Signaling theory proposes that animals (including humans) may send honest signals about desirable personal characteristics and access to resources through costly biological displays, altruism, or other behaviors that would be hard to fake.

Rory Sutherland, Alchemy

We are always wondering with people: Is this person legit? Or are they faking it?

We look for clues, or signals.

If we walked around blindly trusting everyone, we would end up on a Scientology documentary with a bunch of vitamin supplements, car warranties, and cryptocurrency.

Ben Horowitz, in his book The Hard Thing About Hard Things says, “Without trust, communication breaks. More specifically: In any human interaction, the required amount of communication is inversely proportional to the level of trust.”

In other words, if we trust each other, then I don’t need any explanation of your actions. I know whatever you are doing is in my best interest. If we do not trust each other, we need to set up tests.

If Gordon Ramsey says the eggs need more salt, you probably trust his assessment.

If a stranger asks you for a loan, you may have a few questions.

Building trust takes time. If we had 1,000 hours with someone, we would know whether to trust them or not. But, we don’t have a 1,000 hours.

The goal is to understand what costly signaling is, get better at identifying when others are doing it honestly, and dishonestly, and use this to our advantage.

So, if we want to figure out whether someone is trustworthy, we would require costly signaling.

If we want to demonstrate that we are trustworthy, we would do some costly signaling.

Guaranteeing trust and loyalty in human affairs is impossible, but we can improve our odds.

Costly signaling is everywhere. One of the most interesting ways to talk about this idea is in the context of dating.

Generally, women are looking for a man’s ability to acquire and defend resources, while men are looking for a woman’s ability to conceive and take care of future children.

A Rolex and a Chanel purse are two examples of costly signaling, but they are unreliable because you need additional information. First, they can be faked. Second, what you really want to know is whether it is a discretionary purchase or a consequential percentage of the person’s net worth.

Then there are things that you cannot fake, like wit or emotional control.

These are both reliable signals.

Make Everyone Give You An Engagement Ring

Alchemy by Rory Sutherland
The audiobook version is entertaining because of Sutherland’s charisma and British accent.

Many things which do not make sense in a logical context suddenly make perfect sense if you consider what they mean rather than what they are.

— Rory Sutherland, Alchemy Part 3: Signaling

It is easier to text “Happy Birthday!” than it is to go to CVS, read through several cards, pick the right one, pay $8.00 for a card with a $7.99 gross profit, find the person’s address, hand-write the card, address the envelope (even worse when your handwriting is embarrassing), find a stamp, and mail it.

Everyone likes getting a birthday card because we intuitively know the person had to do this.

The reason it has meaning is because of what it “cost” the sender (specifically his or her time more than the money).

Any wiggling out of the above “costs”, even the smallest ones, takes away from the meaning. If you use a label instead of hand-writing the address, it feels different.

Then you up the stakes to something like engagement rings.

The people who think it is silly to spend a lot of money on an engagement ring are likely similar to people who misunderstand art.

The INDISPENSABLE QUALITY of an engagement ring and art is that it….SERVES NO PRACTICAL PURPOSE.

If either served a practical purpose, then you would have to pick something else that didn’t make logical sense.

It must be costly, too.

Spending $35,000 on an engagement ring and spending $30,000,000 on a Van Gogh painting are both versions of costly signaling.

In each of the situations, it would have been more efficient to:

  • Text “Happy Bday”
  • Say, “I love you, but we should put this engagement ring money into a low-cost index fund.”
  • Simply say, “Hi, I’m rich” and stare at the Van Gogh painting instead of buying it (just look at it).

Which option is more effective, though? The efficient one or the costly one?

This highlights the key features: it must be hard to fake or require skin-in-the-game.

Two important comments about “costs”:

  • When we say cost, we mean time, labor, effort, and energy, in addition to money. Money is simply a proxy for the others.
  • Costly is relative. All the magic comes from making the signaling costly to a specific person. Let’s suppose I was dating Margot Robbie. If I had to pick between her taking me out to a $10,000 dinner and her making me a recipe that required a lot of work at home, the homemade meal would cost her more because she can make $10,000 on her phone before the oven pre-heats. Therefore, the homemade meal is more meaningful.

As we talked about in Facilitating an Experience, we want to make people say Wow.

If you want to get someone’s attention and make them say Wow, do something that is costly to you and hard to fake. If you want someone to earn your trust, make them put skin-in-the-game that is costly to them.

Paraphrasing JFK. We do these things not because they are easy, but precisely because they are hard.

More Examples

  • College
  • Consistency
  • Cleanliness
  • Fitness
  • Generosity

See also:

Thanks to James Bunch and Suzanna V. Wood for reading drafts of this.

One comment on “Hard to Fake: Costly Signaling

  • Facilitating an Experience – extra guac

    […] evolutionary biology, this is called costly signaling. The resort not only executed on the basics, then exceeded them. They went on to do something that […]

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