An Explanation of a Signalling Game in Game Theory

LivingSocial Part II

A signaling game in game theory is one where one player has to make a decision based on an 
incomplete understanding of the other player.  The idea behind this game is most often 
applied to an employer hiring an employee, and the signal most often used is a college degree. 

Let's start at the beginning. Game theory is a way to determine the outcome of an event 
involving more than one rational actor based on each actor’s preferences.  These preferences 
are often represented as a number. For example, I prefer chicken to fish, so chicken is 
represented by 2 and fish gets a 1. The number doesn't matter, only that chicken is higher 
than fish.

Okay, back to the signal game. An employer would prefer to hire a skilled worker than an 
unskilled worker, so skilled worker gets a 2 and unskilled gets a 1.  How do they know the 
worker is skilled or not? In recent times the employer has looked for a college degree.

But, is it worth it for a skilled worker to get a college degree? Well, that depends on how many
 other people have degrees. If too many people do, then the signal loses value and it’s not such 
a good idea. Let’s see why:

If you are a skilled worker, getting a degree is relatively easy for you, and harder for a low 
skilled worker. That means there are fewer low skilled workers with degrees, and the probability 
of an employer hiring a low skilled worker decreases.  But what happens if a degree is easy to 
obtain? Well, in that case the probability of hiring a low skill worker doesn’t change, and the 
degree loses its value as a signal of worker competency.

TLDR: College degrees don’t mean much if everyone has them.