Kids are walking "bullshit" detectors. They can smell anxiety, dishonesty, cowardice, awkwardness, trepidation and weakness in adults (or other kids) from across the yard or room or street -- probably even the heavens! Their brains are ravenous and alert and mostly (or completely) pristine, giving their bullshit radar-detectors a polished sheen, so that when the bullshit flies around them, it sticks clearly to their mental screens. They often consciously know what's happening, but, if not, they tap into it subconsciously and act accordingly to the person they are around, whether adult or other child.
For their subconscious mind, the other person's words and actions represent themselves generally as "Is this person truly confident about his rectitude?" or "Are this person's actions and words as hard as the big rock in the back yard, as hard as the reality around me, as sure as the cause and effect in the world?"
"Confidence" is a tangible intangible. It's one of those "I know it when I see it" things in other people. Even the smooth shyster's subtle bluster reveals itself ever so slightly to a kid and to adults as sort of fake confidence via melodrama or shifty eyes or stentorian style or lack of ease in expression.
Being primal animals that are also rational, children are constantly searching for things that break, testing boundaries for weakness that can be exploited. It is a natural thing for them with the world around them, and it is used on the people in their lives. When weakness is found, it is exploited. It is survival -- survival of the fittest. It takes a confident, sure hand in a parent to guide the child in such situations, when necessary, to ensure the the exploitation is moral or that it shouldn't occur for objective reasons. This is one of the primary responsibilities of parents until the burgeoning rationality of the child learns to live in a society of people by objective standards, by objective principles that foster self-esteem and efficacy.
It is also necessary for parents to attempt to be objective all the time and correct any of their own irrationality immediately upon seeing it or upon getting a sense (feeling) that irrationality may be involved. It is, of course, necessary primarily for the adult to be happy, but the secondary benefit is being able to raise a happy, confident child that will be a beloved confidant for the years to come.
If you try to act confident but aren't, you're in trouble deep. The bullshit detector will sniff it out in an instant, and then the labyrinthine battle for power positioning will begin -- and the child will eventually win because you are out of control and will revert to further irrationalities to buttress the original irrationality in an attempt to regain control. I've seen this countless times with friends and acquaintances and their kids. It is horrifying to watch the vicious circle they get trapped in. It is upsetting to see the raw emotions aimed at a loved one with designs of hurting. It is depressing to see a child subconsciously understand that his parent hasn't a clue, and the child must attempt to tackle a big, complex, often-dangerous and cruel world all by himself. He often doesn't know this consciously, but he feels it, and the anxiety is palpable and visible to the rest of us.
As Objectivists know, the only way to be confident is to learn how to be rational all the time, to have a thorough understanding of how your mind works, to integrate a rigorous morality, to stay focused on values each hour of the day, and to universally implement all of the above in every minute of your life. Then, what you say and HOW you say it will tell your child, any child, any adult, that you are confident about reality, you mean business, you understand your business, you can explain your business, you are rigid but benevolent, you are strict but fair, and you are a moral hard rock of existence that cannot be broken, and therefore you are trustworthy and a person with whom your child can share thoughts, emotions and life without worry of retribution, senseless violence or putdowns, confusion, or any kind of injustice.
Any other method or path is woefully lacking -- and will lead to unhappiness in your life and your poor child's life, too. If you don't live by rational absolutes, many things will go absolutely wrong. If you achieve absolute certainty about what is right and live it, things will be just fine -- very fine indeed.