Law and Economics Applications to Privacy Law

Introduction

Professor Moglen has been accusing us students, and the vast majority of society in general, at surrendering freedom voluntarily, for the limited benefits of “shiny” products. According to Moglen, by inviting these products into our lives, we self-inflict harm, ranging from the “trivial” use of private information for commercial purposes; to the grave risk of persecution by those with power.

Under Moglen’s premise, I would like to suggest relevant theories from the fields of classical and behavioral law and economics (“L&E”) that are useful in understanding why people still choose to use these products. Furthermore, such analysis bears the potential to contribute to activists’ discussions on how to raise awareness to the harm people inflict upon themselves and society, and to persuade people to amend their behavior.

Classical L&E

One possibly relevant theory, drawn from the field of classical L&E, is rational ignorance (or apathy) (Lemley 2001, Rational Ignorance at the Patent Office). Consumers might be rationally ignorant if they make an informed decision that the expected cost of further educating themselves about certain risks is higher than the expected harm. One might argue that our case is indeed such a case of economically rational behavior; if the harm from the use of personal information for commercial purposes does not bother many consumers, and the risk of persecution is extremely low. However, an economically rational actor operates based on the full information available to him (at no cost) and it does not seem to be the case here. The majority of consumers are not even aware of any risks involved and surely cannot perceive the harsh long-term societal risks they impose upon themselves. Therefore, many consumers do not have any dilemma concerning how much should they invest in exploring whether the product is “worth the risks.”

Therefore, I think other theories – from the field of behavioral L&E, which sets aside the assumption of rationality – could provide better insight here.

Behavioral L&E

Consumers’ misperceptions

Consumers tend to myopic behavior, ignoring small probabilities (Sunstein 2001, Probability Neglect: Emotions, Worst Cases, and Law) and optimism (Jolls 1998, A Behavioral Approach to Law and Economics). These well-recorded tendencies could potentially lead consumers to underestimate and disregard the risks of their use of such products. Consumers that tend to myopic behavior might disregard long-term effects of their decisions, and therefore will not fear for their personal freedom (even if they understand the gravity of such harm), as long as they consider it as more of a longer-term threat. Tendency to ignore small probabilities could result similarly, if consumers consider a future where they will be under eminent threat of persecution as a “state of nature” of low probability. Also, even if consumers realize that this is already an existing threat, they might still disregard it if they live where there is currently a very small chance of such an occurrence. Even if the consumer fully understands the gravity of being persecuted, he will not take it into account because he assigns 0% probability to such a scenario. Similarly, Optimism could bring a consumer, even if he understands the general grave risks involved, to think that “it wouldn’t happen to me.”

This leads to the conclusion that perhaps, in order for things to get better, they first have to get worse. As the situation will deteriorate, potentially more and more people will be exposed to stories about those harmed, and only such “availability” could eliminate these tendencies. If the government took your neighbor, you will know that it might also eventually come for you. Is it possible to fix these misperceptions in less painful ways? In the context of crime deterrence, it has been argued that in order to eliminate criminals’ perception of “I’ll never get caught” the police should make arrests as “loud” as possible, to reach other criminals’ attention and impact their perception of the arrest probability. Applying this logic here provides an additional justification to the need for activists to effectively communicate the risks to as many consumers as possible.

Contract Design

Another contribution of behavioral L&E is to the understanding of information asymmetries and contract design. Researches on the exploitative nature of consumer contracts have had a significant impact on regulation and practices in different markets, such as home loans or mobile telecommunications (Bar-Gill 2009, The Law, Economics and Psychology of Subprime Mortgage Contracts). As far as I know, despite growing attention to the relations between companies such as Google and Facebook and their users, these contracts/privacy policies are still not being taken as seriously (by researchers and regulators) as more “classic” consumer contracts. The reason, I suspect, is the lack of money consideration; a very unpersuasive justification. To the contrary – because no money changes hands, these cases are even more prone to abusive practices – consumers are much better “trained” to identify “how much” are they paying in a deal, in comparison to “what they give.” Therefore, more efforts are required in order to promise sufficient disclosures that will overcome information asymmetries and allow consumers to truly realize what they sacrifice.

It is also important that consumers will understand that the freedoms that they give up have value (even monetary!). Researchers have identified an endowment effect: people tend to ascribe more value to what they own (Knetsch 1989, The Endowment Effect and Evidence of Nonreversible Indifferences Curves). Such an effect means that if consumers will have better understanding of the freedoms they lose and their worth, and develop a sense of ownership over them, Google will have much harder time taking them. With that regard, perhaps even the information on how much am I, as a consumer, is worth to Google, could affect my decision.

Conclusion

The application of (mainly behavioral) L&E into privacy law could improve the understanding of why consumers disregard the harms of their choices; and raise interesting ideas about how to promote change. Obviously, this paper has only touched upon several applications, and there is much room for further thinking.