1. 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

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

3. 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.

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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

15. Group A: 27 Undergrad Students GEWEWHWNone Week1Freq. Prot. 2222 21 19 13 Week2Freq. Prot. 1111 22 22 Week3Freq. Prot. 0000 17 14 81 Week4Freq. Prot. 3232 10 311

16. Group B: 32 Graduate Students GEWEWHWNone Week1Freq. Prot. 2121 22 14 62 Week2Freq. Prot. 0000 15 11 102 Week3Freq. Prot. 1111 10 6 151 Week4Freq. Prot. 1010 13 11 97

17. 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

18. 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

19. Pilot Experiment #2: Usage and Risk Levels ScenarioGrand Avg.Risk Avg.Usage Avg. 112.610.814.4 29.58.910.0 311.510.212.9 413.411.715.2 514.914.315.6 Low is 3, Moderate is 10, and High is 20. No use is 0.

21. 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

22. For Information on Privacy Research at NCSU: http://theprivacyplace.org/ and http://www4.ncsu.edu/~jbearp/