Friday, May 01, 2009

Advances in Signaling?

In class on Wednesday, we discussed using signals to establish credible separation of types. Tyler Cowen points out a proposal to make consumer signals more informative and credible:

For example, companies could sell certain products only to consumers who have a certain minimum or maximum score on one or more of the certain Central Six [personality] traits. Hummer dealers could advertise that the "Party Animal Red Pearl" paint color is available only to customers who score in the top 5 percent for extraversion. Customers who want to display their unusually high extraversion through that bright red color would have to electronically validate their extraversion score at the dealership before they could sign the purchase agreement. In this way, Hummer could guarantee that Party Animal Red Pearl becomes a reliable signal of friendliness, self-confidence, and ambition. Or Lexus could sell the "Mensa Quartz Medallic" color of the LS 460 only to customers whose validated intelligence scores are high enough for them to join Mensa International (IQ 130+ or the top one in fifty). The more exclusive "Prometheus Glacier Pearl" color could indicate an IQ above 160 (the top one in thirty thousand) -- the qualification for joining the Prometheus Society.
We already use purchases to signal something about ourselves to others (ask yourself why you have a logo on your shirt or hat or why companies spend so much trying to attach meaning to those logos), but these signals are weak because it is pretty low cost for other types to mimic the signal if they want to (e.g., if the benefits of mimicry are sufficiently high). By tying purchases to actual differences, the signal become more credible. As such, those seeking to distiguish themselves might be willing to pay higher prices. High prices may make restricting sales to only "qualified" people profitable. Thus, the system could persist as an equilibrium.

Cowen, though, thinks the idea is absurd, and it certainly feels weird, but is it really absurd?

I think it would be an interesting idea for companies to do this type of thing (although they wouldn't because they would most likely sell less units and decrease profits). I think a person could 'fake' a personality trait, but they probably couldn't fake an IQ test though. But if companies did have tests that worked and could not be faked, then the signals their products sent would indeed be more genuine and their consumers would reap greater benefits and probably be willing to pay a higher price for the product.

This type of thing could also be used by firms in the hiring process. Instead of simply taking degrees/level of education at face value, firms could test all potential hires to determine their knowledge and ability level. I know that firms already to some testing of applicants, but I think they should probably test much more. It is unfortunate that people have to go to college and pay large sums of money for an 'education' that signals employers so they can get better jobs and make more money. Why not just ignore the degree (which by itself means nothing) and test all applicants on their knowledge?

If firms did that, then people would not feel forced to go to college and they would be free to study and learn on their own terms. There are innumerable resources available to people through books, video lessons, periodicals, etc., etc., and a person through their own hard work and ambition could get an excellent education. In fact, a person can do that today, but since they would lack an 'official' education their chances of getting a job are virtually null. (I am reminded of a line from Good Will Hunting about paying $150,000 for an education you could get in late charges at the public library.)
....Rather, an education you could get for a dollar fifty in late charges at the public library.

(I wish you could edit posts...)
I think its absurd bc signals it self can be biased or excessive. unless purchases stays first owner forever signaling is pretty much useless.
It sounds wierd but I think this kind of things exist around the market. For example, the luxuary product is kind of this. Even though the luxuary goods are not related to the IQ but the people who purchases the goods (like Gucci,Burberry,LVMH(Louis Vuitton Moet Hennessy) and so on) wants to feel their taste from the luxuary brand. with intuition, the luxuary brand show the signal they are afford to buy it , they are not poor,but richer. This is one kind of signal to buy that kind of things I guess.
In practice this theory would be illegal and very socially abnormal. however, in theory it would work quite well. For example, why do people pay sometimes hundreds of thousands of dollars to be members of an elite country club- to distinguish themselves. Why do people pay a thousand dollars for a blouse when they could get one that looks nearly the same for $25 at target? To have the name brand on the shirt and in turn distinguish themselves.
Therefore, the idea of having qualifications for purchases could actually make good economic sense. take the case of the Lexus LS 460. Perhaps a man was interested in buying a Mercedes but Mercedes didn't have the distinction of the Mensa Club associated with any of there cars. Even if this man preferred the Mercedes simply from an automotive perspective ho would still be likely to buy the Lexus in order to distinguish himself, thus proving the economic and competitive value of qualifications.
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