A recent study in behavioral economics, conducted at Carnegie Mellon’s Heinz School of Business, shows that people can be inconsistent about their desire for privacy. The economists at Carnegie Mellon found that most people feel entitled to have their private information protected, but conversely are willing to trade away their privacy for a small reward.

Consumers do not react with complete rationality when dealing with most things, let alone their privacy.
This is demonstrated everyday with loyalty programs which collect buying patterns or websites spruiking free iPods having discovered that they can collect gobs of data about their markets by offering sign-up freebies; these techniques are being used by savvy, and not so savvy, marketers alike. Marketers are simply turning consumer irrationality to their advantage.

The individual just doesn’t know what the information collector is going to do with their data and so often fails to consider the implications of giving away their private data.

It’s just plain difficult for a person to determine the risk of exposing personal information. Information may be resold or leaked accidentally, bartered, swapped or published; without foreknowledge of the final use of the data it is nearly impossible to accurately gauge the relative reward offered for the information. In economics terms, there exists “information asymmetry” between the collector (who has greater knowledge of what the information is for) and the consumer (who has to use limited information to make a decision).

Consumers are often unaware of the possible actions a marketer will take to collect their information (think: spyware) and are also ignorant of the steps they can take to protect their personal information.

The researchers tested the effects of spyware warnings and discovered that the more frequent and severe the warnings, the more likely consumers were to just install it anyway. Consumers’ decision-making is affected by biases, heuristics (e.g. simplified guesses), and optimistic risk analysis. The study found that people, overwhelmed by too much information, relied on simplistic strategies to decide whether or not to release their personal information. Rather than help, giving consumers too much information about their privacy leads to worse judgment.

Consumers who are concerned about their privacy must seek to better understand what information marketers can gather before making a decision to release their information and, for marketers, it seems that having a slick website and a free iPod offer is enough to get consumers to open up. How are you going to leverage personal data whether it is yours or your target markets?

Behavioral Economics, Carnegie Mellon University, consumer irrationality, decision theory, freebies, Heinz School of Business, information asymmetry, privacy