Cheap Talk and Credible Commitment

Cheap talk is a message that costs the sender nothing to send, regardless of whether it's true, and carries no automatic penalty for lying. A trader announcing "I'm a big buyer of this name" is cheap talk if there's no obligation behind it — the statement itself changes nothing about what happens if it turns out to be false. Because cheap talk is free to fake, rational listeners should only believe it to the extent the sender's incentives already happen to align with honesty; if the sender benefits from the listener believing something false, cheap talk alone can't credibly convey it.

A credible commitment solves this by making the message costly, binding, or verifiable, so that a dishonest version of it would actually hurt the sender. Actually placing a firm, visible order at a price is a credible commitment about intent to trade there, in a way an unbacked verbal claim is not — because canceling it or being run over by other traders carries a real cost. Similarly, a company issuing debt (rather than just saying "we're confident in future cash flow") is a credible commitment, since defaulting on debt has real consequences that merely talking does not.

For example, in a negotiation, saying "I won't pay more than $100" is cheap talk and can be freely walked back; publicly signing a contract capping the offer at $100, with a penalty for breaching it, converts the same claim into a credible commitment the other side can actually rely on.