Quantifying Privacy Choices with Experimental Economics College of Management North Carolina State University WEIS Harvard University June 2-3, 2005 David L. Baumer Professor of Law Julia B. Earp Associate Professor of IT J.C. Poindexter Associate Professor of Finance

Privacy Values of Consumers q Many studies have addressed consumer privacy concerns q Why are these endeavors important? –Company policies –Enforcement –Auditing –Legislation

Privacy Values of Consumers q For Example, Earp et al. –Worldwide survey of over 1000 respondents –36 scale items –Consumers are most concerned with (in order): Information Transfer Notice / Awareness Information Storage “Examining Internet Privacy Policies within the Context of User Privacy Values.” IEEE Transactions on Engineering Management, May 2005.

Survey Limitations q There are no consequences to choices q Responses tend to make respondents look good q Sizeable disparities between what respondents say and what they do

The Continuing Question » How can we accurately determine the value that consumers place on privacy?

Uses of Experimental Economics q To test game-theoretic hypotheses (interactive behavior experiments) q To perform investigations into industrial organization issues q To test theories of individual choice –Decision-making under uncertainty

Individual Choice q Subjects participate in a game –opportunities for certain gambles or risks –real money q Construct a utility curve q Predict individual behavior

Privacy Related Objectives q Develop an economic model of consumer privacy concerns –General –Financial –Healthcare q Economic model that relates benefits/risk to access choices

Why Experimental Economics? q Unreliability of surveys q All external factors can be controlled and the system can be agitated by single influences –Passage of privacy legislation –Increased outbreaks of identity theft –New technologies

The General Experiment: Assumptions q Assume more intensive Internet usage can bring increased benefits, but can also bring additional risks q Rely on a “money account” measure for tracking net benefit from Internet usage choices

The General Experiment: Process q Participants choose a usage level q Outcomes are announced q News stories of exceptional outcomes are revealed q Sensitivity to the introduction of privacy changes –Legislation –Technology protection –Education –Hacker innovations q Participant with the highest net value in his/her account wins

Payoff Matrix q Payoff Matrix will reflect possible benefits and possible risks/burdens to using the Internet q The possible benefits of using the Internet q The possible risks of using the Internet

Pilot Experiment #1: Online Job Search q Two pilot groups q Four week time period where participants submitted resumes in an experimental setting q Grade incentive (using a money account)

Pilot Experiment #1: Online Job Search Choices q General employment websites –50% chance of being hired in the first three months –Average starting salary = $30,000. q Employer websites –Requires more information –50% probability of being hired in the first three months –Average starting salary = $40,000 q Headhunter websites –Requires much more information –25% probability of being hired in the first 3 months –Average starting salary of $60,000 q Family and friend contacts –Average starting salary = $20,000

Group A: 27 Undergrad Students GEWEWHWNone Week1Freq. Prot Week2Freq. Prot Week3Freq. Prot Week4Freq. Prot

Group B: 32 Graduate Students GEWEWHWNone Week1Freq. Prot Week2Freq. Prot Week3Freq. Prot Week4Freq. Prot

Pilot Experiment #2: Automated Process q Proof-of-Concept q General Pilot Experiment q 12 participants q No indication of probabilities presented q 5 Scenarios with 5 iterations each

Pilot Experiment #2: Scenarios 1. Moderate amount of spam / viruses 2. Increased amount of spam / viruses. Legislation and law enforcement to combatincreased malicious activity 3. Moderate amount of spam / viruses 4. Participants can purchase protection against spam / viruses 5. Participants can purchase additional protection against spam / viruses

Pilot Experiment #2: Usage and Risk Levels ScenarioGrand Avg.Risk Avg.Usage Avg Low is 3, Moderate is 10, and High is 20. No use is 0.

The Next Steps q A more sophisticated simulation environment q Several experiments –General experiment –Financial experiment –Health care experiment q Augment with survey results q In the end, determine what consumers truly value and when they are willing to compromise

For Information on Privacy Research at NCSU: and