Signaling toward market efficiency

Today’s WSJ had a great article about new methods being tested by economists to enhance market efficiency via the introduction of new mechanisms into the marketplace.

 

“Profs. Roth and Niederle belong to a growing field of economics known as market design, which is rooted in the idea that markets, if left to develop on their own, often get into trouble and need to be fixed.”

 

An example of this inefficient market is a dating website where because men employ a “throw everything against the wall and see what sticks” approach. As a result, women are inundated with electronic “winks” (as they are called on Match.com) from men who send them to multiple women. One way to curb this behavior is to limit men to a fixed number of “winks” per month/week, hence giving them an incentive to only send “winks” to women they are truly interested in.

 

 “At this past weekend's annual meeting of the American Economic Association, which hosts a vast job market for aspiring professors, academics tested a technique -- borrowed from online dating -- to more efficiently match job candidates and potential employers. It is called "signaling," and it is designed to reduce the time and cost of hiring professors by weeding out those who aren't serious prospects and homing in on those who are.

 

Signaling depends on a centralized system through which each job seeker sends signals -- essentially electronic pings -- to two potential employers. With a limited number of signals to send, the logic goes, candidates will send them only to schools where they really want to work.

 

Job candidates were warned not to waste signals on schools that should already know they are interested or are out of their range, but instead aim at schools that wouldn't otherwise be aware of their special interest. Schools also were told not to take the absence of a signal as a brush-off.”

 

The exercise at the American Economic Association holds huge implications for the business community. I can tell you that the “throw everything against the wall and see what sticks” approach is not used only by men on dating websites but by MBA students as well. When I was at the “black MBA” and the National Society of Hispanic MBA (pronounced nar-shim-BAAAARRRR) job fairs, my primary goal was to visit all the booths of the companies I truly was interested in working for. After that was accomplished, I went to booths of other companies to get free stuff, make small talk, and waste the time of the recruiters to shoot for the off chance they would have something I would want. If I had been limited to visiting only a certain number of booths, then I might have made my choices differently and the recruiters at some of these booths may have had the opportunity to better spend their time by talking to those who were more likely to be interested in the company and not there merely to get a free digital alarm clock.