A game-theorists’ term derived from the commonplace admonishment “Talk is Cheap.” To say that “talk is cheap” is to suggest that words have no meaning because they don’t raise the stakes. “Actions speak louder than words.” Or, to quote the game theorist Yogi Berra “A verbal contract isn’t worth the paper it’s written on.” Our casual understanding that the meaning of words derives solely from their ultimate consequences demonstrates that we have deep game-theoretic instincts.
But game theory is useful because with careful study we arrive at insights one or more steps beyond our instincts. And indeed, upon further reflection, just because talk is cheap does not imply by itself that words have no meaning. In fact “cheap talk” can and often does matter because it enables credible exchange of information provided such communication is consistent with self-interested motives. Even though talk is cheap, when upon landing at O’Hare, I phone my taxi dispatcher and tell him I am ready to be picked up at the curbside, he believes me and sends a cab.
Moreover, cheap talk is credible even when there is substantial conflict of interest between the talker and the listener. Despite my claims to the contrary, the dispatcher knows that I am actually calling from inside the airplane and I am not at the curbside yet and he delays the dispatch long enough so that the driver arrives at the curbside after me and not before.
Suprisingly, talk can be credible sometimes only because it is cheap. If instead of me, it is an uninterested third-party who calls the dispatcher to send a cab, the dispatcher knows that she has no reason to say anything other than the truth, and the dispatcher sends the cab immediately.
A final digression on the genesis of the phrase “cheap talk” as a term of art in game theory. It is tempting to suppose that the popularity of the phrase derives from the irony that the logic of incentive-compatible communication turns the idea that “talk is cheap” on its head. But the origin of the phrase is something of a mystery. The first game theorists to demonstrate the role of communication in strategic interactions were Vince Crawford and Joel Sobel in their hugely important paper “Strategic Information Transmission” Interestingly, a quick search through the text of that paper reveals that neither “cheap” nor “talk” appears anywhere in the paper.
(dinner conversation with Dilip, Tomek, Stephen and Sylvain acknowledged.)