Arnold Kling  

Robin Hanson on the Signalling Process

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My Favorite Convert... Samuelson vs. Friedman...

He writes,


a boss who has known you for years may not promote you unless you get a better degree, even if that teaches you nothing useful for your job. He might not hire you without that degree, even if knows and trusts folks who have known you for years. Why do people who know us well care so much about such shallow signals?

Your boss doesn't just want high quality subordinates; he wants his boss to think he has high quality subordinates. Actually he wants his boss to be happy about it, which requires his boss be happy about it, etc. We all want to affiliate with high status people, but since status is about common distant perceptions of quality, we often care more about what distant observers would think about our associates than about how we privately evaluate them.

Read the whole thing. The idea is that in a large, complex society, shallow signals may become more important than accurate information. It is a really profound insight, deserving of more development. For example, in banking, it may explain why "AAA-rated" became more important than truly having a low risk of default.


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COMMENTS (15 to date)
Troy Camplin writes:

My wife and I were talking last night about my inability to get a job, and she pointed out that her experience was that nobody wanted to hire anybody worth having, because those people were perceived as threats. Now, I don't know if I'm worth having, but I have been told I was overqualified for positions that required a Ph.D. only shortly after I received my Ph.D. It seems to me that in such circumstances, she's right that I am somehow perceived as a threat. She also pointed out that nobody actually wants anyone who will do anything (nor do people actually want to do anything) -- they only want the appearance. That seems to be my experience with the conservative/libertarian think tank community as well. Which may explain the dismal failure of the movement all this time. Certainly, if you give the appearance of working and you are involved in Leftist organizations, then you are actually helping the movement, since you keep the people you claim to want to help destitute, meaning you are still "needed". But this approach by libertarians only works to keep the movement small. I can't even seem to volunteer my skills to the movement. They seem afraid I might actually do something.

Greg Ransom writes:

This is an important insight, well expressed.

Justin writes:

That's a good post, but I think it also shows that conservatives and libertarians need to get out of the neoclassical/Austrian box and look more at behavioral/evolutionary game theory and behavioral economics (I am a conservative).

When you think of a firm as a single autonomous agent then of course it will have an incentive to develop a good brand name and please customers. But behavioral game theorists have long realized that the different members of a firm have competiting interests and the outcome is inefficiency. Firms are common goods and the incentives of individuals and management are different than those of the residual claim holders.

As a conservative my take from this is the need for an internalized work ethic and moral behavior for institutions to work. "Getting the incentives right" is not always possible.

David R. Henderson writes:

Dear Troy,
Are you volunteering? That's why I understood you to say. If so, please contact me. The webmaster can tell you how.
Best,
David

user writes:

Troy, a Ph.D that can't get a job seems to be an anecdotal counter to the theory in this post.

Neal W. writes:

I wonder if this phenomena is a natural aspect of markets or is an unintended consequence of government intervention, because both things mentioned are heavily intervened in by the government.

Troy Camplin writes:

Justin,

Actually, the last thing we need to do is get away from Austrian economics. Especially the idea of spontaneous order, which in fact is an evolutionary theory, and is deeply related to evolutionary psychology and game theory. I connect self-organization, emergence, game theory, evolution, catastrophe theory, and information theory together in my book Diaphysics. In fact, Hayek points out that economics is really a knowledge problem. Hayek also observes that when a spontaneous order is allowed to emerge naturally, it encourages rational and ethical behavior. At the same time, there does have to be an initial ethical base from which those ethical rules evolve. Governments do a great deal to undermine that base -- another point Hayek makes. Don't throw out the Austrians so fast.

user,

Read the second part of that post again. He's saying those doing the hiring don't actually want qualified people, they want there to be an appearance that they have qualified people. They also don't want to have anybody who can threaten their position. Thus, appearance is more important than substance.

Liam McDonald writes:

Well stated, Arnold. I have always held the view that reality is not important but only the perception of what is real. Drawing the veil from perception gives true insight. It's a good way of looking smart without actually being smart. You need only be thorough

tom writes:

The AAA label being slapped on repackaged trash makes me think of the movie Tommy Boy, when Chris Farley is responding to a parts store owner who says that Farley's competitor's product must be better because of the guarantee right on the box:

Tommy: Let's think about this for a sec, Ted, why would somebody put a guarantee on a box? Hmmm, very interesting.

Ted Nelson, Customer: Go on, I'm listening.

Tommy: Here's the way I see it, Ted. Guy puts a fancy guarantee on a box 'cause he wants you to fell all warm and toasty inside.

Ted Nelson, Customer: Yeah, makes a man feel good.

Tommy: 'Course it does. Why shouldn't it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted?
[chuckles until he sees that Ted is not laughing too]

Ted Nelson, Customer: [impatiently] What's your point?

Tommy: The point is, how do you know the fairy isn't a crazy glue sniffer? "Building model airplanes" says the little fairy; well, we're not buying it. He sneaks into your house once, that's all it takes. The next thing you know, there's money missing off the dresser, and your daughter's knocked up. I seen it a hundred times.

Ted Nelson, Customer: But why do they put a guarantee on the box?

Tommy: Because they know all they sold ya was a guaranteed piece of sh*t. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer's sake, for your daughter's sake, ya might wanna think about buying a quality product from me.

Ted Nelson, Customer: [pause] Okay, I'll buy from you.

Tommy: Well, that's...

Tommy, Richard Hayden: ...What?

John B. writes:

This doesn't fit with my experience.

I've been in the software business since 1980 in a number of companies. In that time I've been involved in lots of hiring decisions (though as an "individual contributor", not as a hiring manager), in every phase from writing the requirements to producing the "yes/no" report to the official hiring manager.

I did not see people worrying about school prestige or trying to hire people who would make them look good but wouldn't threaten them. What I saw was people looking for someone competent who could start soon and let them stop interviewing and get back to their real work.

If you'd argued that "think on your feet" glibness was improperly rated too highly relative to "give me a day to really get the best answer" thoughtfulness, I'd agree.

Equally, in the many promotion decisions I've seen from the outside, the only obvious non-job related influence I've seen has been related to corporate drives for "diversity".

I suspect the academic world is quite unlike the commercial one and that may mislead you. Or maybe software really was different from all other businesses!

Jason writes:

John B., I think its both.

When I was graduating from my undergraduate program, one of my professors put it this way:

Here is a list of schools, in order of prestige. From there, he drew diagonal lines out from the top and the bottom of each school name (forming a cone out from the school). He told me that's your range if you go to that school. Sure, schools overlapped a bit. But if I want to UNC I could never make it to the Harvard graduate's cone.

Sure it wasn't the only reason I didn't pursue an academic career. But it certainly helped make the decision easier.

Also John, I think the software industry is inherently different from other industries. Older industries, like law firms and the investment industry, bet so heavily on where you went to graduate school it makes me sick.

Troy Camplin writes:

John B.,

That's the argument for the free market system right there. The kind of thing I'm talking about happens in government jobs, non-profits, service jobs, education, and other similar jobs. What's the similarity among these? Any real (or actual) competition! But if you actually have to have the expertise to actually make something, then you have to hire the person who can do the job. Still, I have a programmer friend who pointed out that companies still do stupid things, like promoting a great software programmer to management, where he does poorly (and doesn't program anything!).

With my background, I should be a hot commodity for any of a number of educational or nonprofit organizations. But I'm not. Had I gotten a degree in programming or economics or something that allows me to do something other than produce ideas, meaning I could work in the free market, I'd be golden right now.

Bill Drissel writes:

Troy,
This is not original with me, "If you hire A people, they'll hire A people. If you hire B people, they'll hire C people."

Robert Scarth writes:

Troy Camplin:
"That's the argument for the free market system right there. The kind of thing I'm talking about happens in government jobs, non-profits, service jobs, education, and other similar jobs. What's the similarity among these? Any real (or actual) competition!"

I'm not sure this is completely correct.

My conjecture:
The clearer it is whether you are adding value to your organization the less likely it is that signaling matters.

So among sales-people signaling should be almost non-existent, whereas in government jobs it should happen much more. I'd also conjecture that signaling happens more in larger (and therefore more bureaucratic) than smaller organizations.

I don't know exactly how we could test my conjecture. It would be difficult to determine and quantify the lack of an objective measure of value added. Here's one possibility though. We could look at the team selections made by the coaches of international soccer teams. The players that play in positions where there is an objective measure of value added (e.g. how many goals an attacking player scores or how many saves a goalkeeper makes) should be less likely to come from more prestigious clubs than those (e.g. defensive midfield players) where it is harder to find an objective measure of value added. Although it would be very difficult to disentangle the fact that the more prestigious clubs are prestigious because they are better, and have the best players playing for them.

Arnold Kling writes:

Robert,
There are indeed a lot of ways to test your idea that small firms rely less on signaling than large organizations. You could see how MBA's do in small firms vs. large firms, for example.

My casual impression is that you are quite right. If you work for the government, you automatically get a higher salary with a higher degree. If you work for a small company, you have to prove you are worth more in order to be paid more.

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