The Economic Impact of Privacy Violations and Security Breaches

Abstract

In an experiment, the authors distinguish between the impact of privacy violations and security breaches on the subjects' trust and behavior. They focus on first-order effects and thus the direct consumer reaction. While privacy is of prime importance for building trust, the actual behavior is affected less and customers value security higher when it comes to actual decision making. Evidence is found for the so-called "privacy paradox" which describes that people do not act according to their privacy concerns.

A Review of Information Privacy and Its Importance to Consumers and Organizations

“…The most likely outcome will be the use of a simplified model in the process of making a decision (Acquisti & Grossklags, 2005). The difference between an individual's privacy intentions and his or her actual behavior is known as the privacy paradox (Nofer, Hinz, Muntermann, & Rossnagel, 2014;Norberg, Horne, & Horne, 2007). Individuals may be aware of measures that can be taken to protect their privacy, but not make use of them (Dommeyer & Gross, 2003).…”

“…When the individual is uncertain about the outcome of sharing information with a second party and is dependent on the decisions of the latter, trust becomes a factor (Nofer et al, 2014). The trustor will rely upon the trustee if three characteristics are perceived to be met (Bhattacherjee, 2002): ability (the trustee is competent), integrity (the trustee is honest and has moral principles), and benevolence (the trustee intends to do good toward the trustor, acting beyond its own profit motive).…”

“…The trustor will rely upon the trustee if three characteristics are perceived to be met (Bhattacherjee, 2002): ability (the trustee is competent), integrity (the trustee is honest and has moral principles), and benevolence (the trustee intends to do good toward the trustor, acting beyond its own profit motive). Trust is seen as a psychological condition, not a behavior or choice (Nofer et al, 2014). It is also important to distinguish between initial trust, which is when the parties first meet and interact, and general trust, which develops over time based on experiences between the trustor and trustee (Nofer et al, 2014).…”

“…Trust is seen as a psychological condition, not a behavior or choice (Nofer et al, 2014). It is also important to distinguish between initial trust, which is when the parties first meet and interact, and general trust, which develops over time based on experiences between the trustor and trustee (Nofer et al, 2014). …”

“…Privacy issues can endanger the fiduciary relationship with shareholders if the bottom line is affected as a result of stock price declines, the loss of customers, fines, or other costs incurred in addressing the issues (Culnan & Williams, 2009). Privacy breaches can lead to lower customer trust in a firm, while security breaches (which may not necessarily lead to privacy breaches) can lower a customer's willingness to deal with the company (Nofer et al, 2014).…”