Wednesday, July 01, 2009

Privacy and risk

I’m reading Daniel Solove and Paul Schwartz’s text Privacy and the Media, which starts out with an overview of theories of privacy. I was struck by an excerpt from Fred Cate, Principles of Internet Privacy, 32 Conn. L. Rev. 877 (2000) (citations omitted):

Open information flows are not only essential to self-governance; they have also generated significant, practical benefits. The ready availability of personal information helps businesses “deliver the right products and services to the right customers, at the right time, more effectively and at lower cost,” Fred Smith, founder and President of the Competitive Enterprise Institute, has written. …

Federal Reserve Board Chairman Alan Greenspan has been perhaps the most articulate spokesperson for the extraordinary value of accessible personal information. In 1998, he wrote to Congressman Ed Markey (D-Mass.):

A critical component of our ever more finely hewn competitive market system has been the plethora of information on the characteristics of customers both businesses and individuals. Such information has enabled producers and marketers to fine tune production schedules to the ever greater demands of our consuming public for diversity and individuality of products and services. Newly devised derivative products, for example, have enabled financial institutions to unbundle risk in a manner that enables those desirous of taking on that risk (and potential reward) to do so, and those that chose otherwise, to be risk averse. It has enabled financial institutions to offer a wide variety of customized insurance and other products.

Detailed data obtained from consumers as they seek credit or make product choices help engender the whole set of sensitive price signals that are so essential to the functioning of an advanced information based economy such as ours.

The discussion of information collection and processing as a way to manage risk, and thus confer benefits that must be set off against the costs of lost privacy, raises at least two questions. First-order: does the collapse of the financial markets, which suggests that the information was not used to price risk correctly—the risks getting lost in the tranches, as it were—change the calculus of privacy? Here’s a quote from a recent NYT story:

John Kay, a leading Scottish economist, noted recently that he used to teach — along with most other economics professors — that derivatives allowed risks to be transferred to those better able to bear them.

But, he added, experience had shown that to be wrong. Now, he said, he teaches that derivatives allow risk to be shifted from those who understand it a little to those who do not understand it at all. That is not a bad description of how the risks of bad mortgage loans were transferred from those who made the loans to those who bought troubled collateralized debt obligations.

We would be much better off as a society if that particular transfer of risk had been regulated, or even prevented.

Second-order: to what extent does framing information collection as an economic benefit inherently disparage privacy, the way many have argued that framing “national security v. liberty” inherently disparages liberty, when there’s at least as good an argument that, as one of the greats said, those who trade security for freedom will end up with neither? Perhaps a certain level of information privacy actually promotes economic soundness, at a minimum to the extent that it reminds lenders to factor risk into their calculations.

1 comment:

Frank said...

Great post!

As to your first-order point, I think it does change the calculus. It is very hard to value what all the datamongers are doing--and in the case of the financial sector we now know that huge amounts of "negative value" have been created. I draw the connection between the financial industry and other data harvesters in the last paragraph of this post:

This post discusses information asymmetry a bit more:

Finally, this very rough draft points in the direction of limiting the secret collection & commensuration of data by the financial industry: