Signalling theory

Signaling theory explains how individuals or entities communicate information indirectly through actions or traits that reveal underlying qualities. For example, someone might pursue higher education to signal intelligence or competence, while a company might invest in high-quality products to demonstrate reliability. These signals help others assess trustworthiness or ability without direct proof, reducing uncertainty in decision-making. In essence, signals are observable indicators that convey relevant information, allowing parties to make smarter choices based on the implied qualities or intentions of others.