Signaling
Costly, hard-to-fake actions credibly convey hidden quality.
Michael Spence, Nobel laureate. The fix for adverse selection. If high-quality types can do something costly that low-quality types can't, the signal is credible.
Examples: a peacock's tail (a cheap one would be eaten before mating). A degree (high-effort signal that you can complete demanding work). A money-back guarantee (only a confident seller can afford to offer it). A long employment history (suggests competence and reliability).
For operators, signaling matters in two directions. As a sender: what costly signals does your company send that would be hard to fake (long warranties, transparent pricing, founder co-investment)? As a receiver: when evaluating others, what signals are they sending that low-quality types couldn't credibly fake?
Examples in the wild
Companies that publish detailed product roadmaps signal that they intend to deliver them. The low-quality version (vague promises) is cheap; the detailed version is harder to fake.
Buffett's annual letter is a signal. Most CEOs can't write that honestly. The fact that he can (and does) is a credible quality signal.
Buying expensive engagement rings is partly a signal. The cost is part of what makes it credible. Cheap symbolism wouldn't carry the same weight.
Signaling is one of the mental models we apply through real cases inside the Pareto MBA — a part-time program for professionals who want to think clearly about business.