23 June 2014

Privacy Economics

'Alan Westin's Privacy Homo Economicus' by Chris Jay Hoofnagle and Jennifer M. Urban in (2014) 49 Wake Forest Law Review 261 comment
 Homo economicus reliably makes an appearance in regulatory debates concerning information privacy. Under the still-dominant U.S. “notice and choice” approach to consumer information privacy, the rational consumer is expected to negotiate for privacy protection by reading privacy policies and selecting services consistent with her preferences. A longstanding model for predicting these preferences is Professor Alan Westin's well-known segmentation of consumers into “privacy pragmatists,” “privacy fundamentalists,” and “privacy unconcerned.” 
To be tenable as a protection for consumer interest, “notice and choice” requires homo economicus to be broadly reliable as a model. Consumers behaving according to the model will know what they want and how to get it in the marketplace, limiting regulatory approaches to information privacy. While notice and choice is undergoing strong theoretical, empirical, and political critique, U.S. Internet privacy law largely reflects these assumptions. 
This Article contributes to the ongoing debate about notice and choice in two main ways. First, we consider the legacy Westin's privacy segmentation model itself, which as greatly influenced the development of the notice-and-choice regime. Second, we report on original survey research, collected over four years, exploring Americans’ knowledge, preferences, and attitudes about a wide variety of data practices in online and mobile markets. Using these methods, we engage in considered textual analysis, empirical testing, and critique of Westin’s segmentation model. 
Our work both calls into question longstanding assumptions used by Westin and lends new insight into consumers’ privacy knowledge and preferences. A close textual look at factual and theoretical assumptions embedded in the segmentation model shows foundational flaws. With testing, we find that the segmentation model lacks validity in important dimensions. In analyzing data from nationwide, telephonic surveys of Internet and mobile phone users, we find an apparent knowledge gap among consumers concerning business practices and legal protections for privacy, calling into question Westin’s conclusion that a majority of consumers act pragmatically. We further find that those categorized as “privacy pragmatists” act differently from Westin’s model when directly presented with the value exchange — and thus the privacy tradeoff — offered with these services. 
These findings reframe the privacy pragmatist and call her influential status in U.S. research, industry practice, and policy into serious question. Under the new view, she cannot be seen as “pragmatic” at all, but rather as a consumer making choices in the marketplace with substantial deficits in her understanding of business practices. This likewise calls into question policy decisions based on the segmentation model and its assumptions. We conclude that updated research and a policy approach that addresses both rationality and knowledge gaps are key.