Cheap Talk (Costless Communication)

In game theory, communication that costs nothing to send and therefore can't be trusted as a credible signal—because lying has no penalty. 'I'll definitely refer business to you' costs nothing to say and therefore conveys no information about actual intent. In contrast, costly signals (investing time, money, or reputation) are credible because faking them has consequences. Cheap talk is ubiquitous in business: competitor threats, partnership promises, stated intentions, and customer commitments are all cheap talk until backed by costly action. The model explains why verbal agreements are weak and signed contracts are strong.

When to use it

When evaluating the credibility of promises, threats, or stated intentions; when designing agreements that need to be enforceable; when distinguishing genuine commitment from performative enthusiasm; when analyzing whether competitive threats are credible.

How it can help

Evaluate all communication by its cost structure: is this person's statement backed by any costly commitment, or is it free to say? When someone says 'we should partner,' that's cheap talk. When they sign a letter of intent with a penalty clause, that's a costly signal. In your own communication: if you want to be believed, accompany words with costly actions. In negotiations: discount verbal commitments and focus on structural commitments (deposits, contracts, public announcements) that would be costly to renege on. The credibility of any statement is proportional to the cost of it being false.