April 18, 2021

Why do we share our personal data? The privacy paradox

The business model of many tech companies is based on collecting and using data about their customers. Google and Facebook generate revenues by selling targeted ads tailored to users' personal information. Amazon shows you the product they forecast you will buy. Tesla collects data on drivers' behavior and is said to plan using these data to enter into the insurance business. Google has just acquired smartwatch producer Fitbit, which collects data about users' health. The list goes on and on.

Citizens in many countries increasingly voice concerns about the lack of online privacy. Despite expressing these concerns, the vast majority of people widely share personal data on the internet and when using connected devices.

This is the privacy paradox. We fail to take actions to protect our privacy even when we claim to be worried by the lack of online privacy.

To better understand the privacy paradox, Susan Athey from Stanford University and Christian Catalini and Catherine Tucker from MIT[1] ran an experiment offering undergraduate students a free pizza in exchange for disclosing the email addresses of their closest friends. Many students took the offer and gave away their friends' emails. Strikingly, students who stated to be concerned about privacy were equally likely to disclosing their close friends' emails as students who said they did not care much about privacy. This experiment confirmed that behavior towards privacy seems quite disconnected from stated concerns.

Failure to protect privacy is not ubiquitous though. In a recent study written during her PhD at HEC, Huan Tang[2] analyzed a randomized experiment run at a large online lender in China. The online lender routinely asks people who apply for a loan a lot of personal information. They ran an experiment by randomly not asking certain questions to certain loan applicants.

Tang found that not asking some questions raised the chances that the customers completed the application and eventually took the loan. For example, not asking the loan applicant's identifier on the Tencent QQ instance messaging app increases the likelihood that the client takes the loan, thereby increasing the lender's revenues. Not asking the contact information of the employer also had a significant impact, probably because people were concerned that the online lender would call their employer if they failed to repay the loan.

Tang estimates that people are willing to pay the equivalent of a half-day of salary in the form of a higher loan fee in order not to disclose personal data.

This research has two implications. First, it can be in the interest of online companies not to collect information to convince customers to adopt their products. Privacy can be a win-win outcome.

Second, the propensity of customers to protect their data seems to be context-dependent. MIT undergraduates students happily disclose personal information whereas Chinese online borrowers are more cautious. A possible explanation is that customers in China feel less protected against malevolent use of their personal data compared to Europe for instance, so when they have the choice they are more inclined to protect their data. (I would be curious to know what readers from China think of this hypothesis!)

In the next post I will discuss an explanation for the privacy paradox. To be continued...

Edit: The next post is here: Privacy as a public good »


Sources + Research at HEC

[1] Susan Athey, Christian Catalini, and Catherine Tucker, 2017, The Digital Privacy Paradox: Small Money, Small Costs, Small Talk, NBER Working Paper [pdf]

[2] Huan Tang, 2020, The Value of Privacy: Evidence from Online Borrowers [pdf]. Huan is a graduate of the HEC PhD program, now Assistant Professor at the London School of Economics.

Previous post: Do stock prices affect corporate investment? »
Next post: Privacy as a public good »
Home »