Countersignaling

Countersignaling or countersignalling is the behavior where agents with the highest level of a given property invest less into proving it than individuals with a medium level of the same property. This concept is primarily useful for analyzing human behavior and thus relevant to economics, sociology and psychology.

Signals and signaling theory

Many of the things that people and animals want to know about each other, such as toughness, cooperativeness or fertility, are not directly observable. Instead, observable indicators of these unobservable properties must be used to communicate them to others. These are signals. Signaling theory deals with predicting the level of effort that individuals, the signalers, should invest to communicate their properties to other individuals, the receivers, and how these receivers interpret their signals.

Two conditions have to be fulfilled before signaling theory should be applied. First, there has to be informational asymmetry between the signaler and receiver (I know more about my own level of toughness than you do). Second, the potential for divergence or conflict of interest between the signaler and receiver. Without either of these two conditions, there is no need for signals as the problem is merely one of communication. Once these conditions are fulfilled, signals have to be used by individuals to prove to the other person their underlying hidden property.

Much research is concerned with understanding what signals signalers should send to convince a receiver that they have a certain property, and what signals a receiver should be convinced by. One way of doing this is by putting money on the table just to prove that you can; someone without the property would not be able to do the same. For example, in biology peacocks expend energy on elaborate plumage that increase their risk of dying. By doing this they demonstrate their genetic fitness, as genetically less fit males can only grow small plumage, while genetically better individuals can grow larger ones. (In biology, this is known as the handicap principle.)

Countersignaling, by contrast, is showing off by not showing off, or by playing humble. For instance, the nouveau riche are eager to flaunt their wealth, and often surround themselves with expensive luxury items. Those with old money are more understated, preferring not to waste money on such frivolities.[1][2]

There are a number of different models that deal with this behavior and explain how rational individuals – those interested only in maximising certain utility – would find countersignaling beneficial. One of these is by Feltovich, Harbaugh and To.[1][3] They developed a formal model in which receivers of signals judge the senders of signals based not only on what can be inferred from the signal sent, but also on additional information, which is assumed to be helpful but not perfect. For example, senders might be of low, medium, or high quality, and the additional information might be adequate for distinguishing low from high but not necessarily from distinguishing medium from low or high. Under certain circumstances, medium-quality senders will have an incentive to signal (to ensure that they can be distinguished from low-quality ones), but high-quality senders may not—they are not likely to be mistaken for low-quality senders in any case, and signaling behavior may mark them as medium.

References

1. Nick Feltovich, Rick Harbaugh and Ted To, "Too cool for school? Signalling and Countersignalling", RAND Journal of Economics, Vol. 33, Winter 2002, 630-649
2. Conceptually.org, "What are signalling and countersignalling?", Date accessed: October 23, 2018
3. "Signal failure? The economics of understatement". The Economist May 2003. Covering the same Feltlvich/Harbaugh/To paper.