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In game theory, cheap talk is communication between players which does not directly affect the payoffs of the game. This is in contrast to signaling in which sending certain messages may be costly for the sender depending on the state of the world. The classic example is of an expert (say, ecological) trying to explain the state of the world to an uninformed decision maker (say, politician voting on a deforestation bill). The decision maker, after hearing the report from the expert, must then make a decision which affects the payoffs of both players. (Or more informally: What you can say without worry, while at the same time give both parties advantages and trouble free insights about each other.)
To be a little more complete, cheap talk is communication that is (a) costless (i.e. there are no out of pocket costs) (b) non-binding (i.e. does not limits strategic choices in any way) (c) unverifiable (i.e. cannot be verified by a third party like a court) so an agent engaging in cheap talk can lie with impunity (but may choose in equilibrium not to do so).<Farrell (1985)></ref>
Cheap talk can, in general, be added to any game and has the potential to enhance the set of possible equilibrium outcomes. For example, one can add a round of cheap talk in the beginning of the Battle of the Sexes. Each player announces whether they intend to go to the football game, or the opera. Because the Battle of the Sexes is a coordination game, this initial round of communication may enable the players to select among multiple equilibria, thereby achieving higher payoffs than in the uncoordinated case. The messages and strategies which yield this outcome are symmetric for each player. They are: 1) announce opera or football with even probability 2) if a person announces opera (or football), then upon hearing this message the other person will say opera (or football) as well (Farrell and Rabin, 1996). If they both announce different options, then no coordination is achieved. In the case of only one player messaging, this could also give that player a first-mover advantage.
It is not guaranteed, however, that cheap talk will have an effect on equilibrium payoffs. Another game, the Prisoner's Dilemma, is a game whose only equilibrium is in dominant strategies. Any pre-play cheap talk will be ignored and players will play their dominant strategies (Defect,Defect) regardless of the messages sent.
It has been commonly argued that cheap talk will have no effect on the underlying structure of the game. In biology authors have often argued that costly signalling best explains signalling between animals (see Handicap principle, Signalling theory). This general belief has been receiving some challenges (see work by Carl Bergstrom and Brian Skyrms 2002, 2004). In particular, several models using evolutionary game theory indicate that cheap talk can have effects on the evolutionary dynamics of particular games.
- Crawford, V. P.; Sobel, J. (1982). "Strategic Information Transmission". Econometrica 50 (6): 1431–1451. doi:10.2307/1913390.
- Farrell, J.; Rabin, M. (1996). "Cheap Talk". Journal of Economic Perspectives 10 (3): 103–118. doi:10.1257/jep.10.3.103. JSTOR 2138522.
- Robson, A. J. (1990). "Efficiency in Evolutionary Games: Darwin, Nash, and the Secret Handshake". Journal of Theoretical Biology 144 (3): 379–396. doi:10.1016/S0022-5193(05)80082-7.
- Skyrms, B. (2002). "Signals, Evolution and the Explanatory Power of Transient Information". Philosophy of Science 69 (3): 407–428. doi:10.1086/342451.
- Skyrms, B. (2004). The Stag Hunt and the Evolution of Social Structure. New York: Cambridge University Press. ISBN 0-521-82651-9.