The Economics Of Privacy

Tristan recently blogged about privacy as a currency. His point:

Privacy is a currency for which we don’t know the [ex]change rate. It’s something we’re giving to online services without knowing what it’s worth.

I started to apply basic economics to that idea. It seems to me that a key point is that the exchange rate of the currency is not only unknown, but it is also different for different people. You may value your privacy much more highly than I do. By contrast, for people in the same socio-economic group, the value of the information to the company is (approximately) the same. For most of the readers of this blog, it’s worth about the same to (e.g.) Google to know X amount about you as it is to know X amount about me.

A mutually beneficial exchange is one in which both parties receive something of greater value than what they lost. Is our loss of privacy mutually beneficial? It depends. I may decide to put a $50 value on the privacy of my list of friends. If that list is worth $100 to Google or Facebook, and they will provide me with $70 worth of services in return for it, then clearly the exchange is a beneficial one. However, if you value your list of friends at $500, then it would not be a good exchange for you, if all else was the same.

Another important economic attribute of exchanges is that they should be ‘fair’. A fair exchange is one which is uncoerced, and in which both parties understand what they are giving away and receiving. Do people understand what they are giving away when they give away their privacy? Perhaps not. Or it could be just that they put a low value on it. In which case, it’s entirely reasonable for them to make the trade.

Conclusion: privacy advocacy is not about persuading people not to use particular privacy-reducing services, it’s about persuading people to understand the value they personally put on their privacy and perhaps, secondarily, to increase that number. But if people, once they understand, choose not to increase that number and to make privacy-reducing deals, we should respect their free choice.

6 thoughts on “The Economics Of Privacy

  1. Great conclusion. What we need to do it to educate people on privacy issue and let them make an informed choice. Sounds actually pretty close to OpenToChoice.org :-)

  2. Let’s say Joe has Tom, Dick and Harry as friends. Joe values his friends list’s privacy at $50, and sells it for services (priced at $70, but costing $10 to Google to produce) to Google, who value that friends list at $100. So far so good (though one could still argue about who swindled whom): Joe gave away $50 and got $70, Google gave away $10 and got $100. But don’t Tom, Dick and Harry lose something, uncompensated, in Joe’s exchange with Google? Friendship (and trust) cuts both ways.

  3. Tony: interesting point. In one sense, they’ve lost nothing, because the fact that Tom is friends with Joe is a fact that both Tom and Joe have a right to reveal to anyone they want. Tom can’t really say to Joe “I’m your friend, but I don’t want you to tell anyone about it”.

    However, if there are lots of Joes who are friends with Tom, and they all sell their privacy, then the company can work out a good portion of Tom’s social graph without Tom ever having any interactions with them at all. So in aggregate, yes, Tom is losing something of value without being compensated.

  4. This is typical of a view that considers privacy as a good. It is possible to think that way. But some people prefer to see it as a value rather than as a good. A value that is hard to trade, like freedom for example. Freedom is not a good. You don’t want to give away some freedom to pay for a service. It is something fundamental that cannot be sold. Like bodies’ part for example.

    Economics can be applied to all forms of human relationships. But it does not mean all forms of human relationships should be governed by economic logic.

    Freedom has no price. Selling freedom is called establishing slavery.

    “It could be that they put a low value on it. In which case, it’s entirely reasonable for them to make the trade.”

    It may be reasonable for them. But is it reasonable for society that so many people sell their privacy ? In what kind of society do we want to live ?

    You only realise that privacy has value once it is gone. It is just like freedom.

    Most people are way too unaware of the potential (mis)use of their personal data by the Googles and the Facebooks of the web to understand that their privacy is really at stake. This whole business is very immature and information is asymetric. If most people knew how much data these services accumulate about them, they would not use them.

  5. Freedom has no price. Selling freedom is called establishing slavery.

    That’s just not true. Do you have a job? You go to work every day, and your boss tells you what to do (or your customers). Rather than doing whatever you might choose to spend your time doing, you are doing that – in return for money. You are selling (some of) your freedom. And that’s entirely OK, as long as it’s a trade you understand and are willing to make.

    The same should apply to privacy. People may wish to sell their privacy, and that’s just as OK, as long as they understand the deal they are making.

  6. > it’s worth about the same to (e.g.) Google to know X
    > amount about you as it is to know X amount about me.

    That’s the standard assumption, but I think they just figure it that way because the easiest way to calculate said value is to just take the whole value you get out of such information and divide by the number of people.

    In actuality, I’m pretty sure the value of any given person’s information is directly proportional to that person’s tendency to respond to advertising by buying stuff. This varies *tremendously* from person to person, but it’s also extremely difficult to measure.

    Also, most people believe they personally are less susceptible to advertising than average, which mathematically doesn’t work out, so obviously a lot of people have themselves fooled.