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Not participating isn't an option, either. It's a curious conundrum. Will everyone hafta live as if they're a celeb dodging the paparazzi?
To use your celebrity analogy let's take a look at someone like Kevin Spacey. He is an great actor - we know all his films - we see him out in public - we see his picture in the tabloids once in awhile (usually just after a movie comes out) but what do we really know about him? Sure we can Google him or we can search fan sites but the fact is that Kevin made a conscious decision about how much of his life is in the public domain.
Of course there is the flip side to him with someone like Perez Hilton where just about everything is public but again that is a decision she has made.
So I do think that we have a new type of privacy now - one of personal responsibility.
"In some ways it was a way to create a new identity for ourselves in this new world as well as a way to protect ourselves. Then we could interact with others and experiment with different parts of our individuality without putting our real world personas in danger. We could be a part of something larger but yet still be separate from it."
You adopt a new name (a full name: first and last) when you create an account in SL. I had good friends there who never told me their real names. I even contracted out a small bit of Photoshop graphics work to someone there with email exchanges outside of SL and payment in Linden dollars and still never found out their real name.
A lot of people in SL experiment with things they never would in real life so that barrier of privacy is very important to them. Possibly that's because the risk is a lot more obvious, or possibly it's because since Linden Labs made adopting a new persona mandatory to enter people felt liberated from the beginning and realized later what it implied. And maybe that's something that we should adopt for our regular internet interactions. The difference in accountability is that since you can "see" someone in SL, even though it's not them, it feels like you're interacting with them directly and it's not anonymous, even though it is!
The difficulty in using an alias on the internet is that there are parts of our life that we do want to share with people we know offline (like photographs) and we can't do that without showing ourselves. And things that are time sensitive like tweets that are intended for offline acquaintances. There is also sharing things that give us credibility in our careers like blog posts related to our thoughts and discoveries about what we do for a living: if we put those under an alias then it can't be tracked back to us. It's hard to fragment your personality or constantly debate about what goes where. In the end it's just easier to be who you are online and I think that's why most people don't fret over privacy.
In either case it is still a 'fake' persona to an extent regardless of whether or not you can 'see' the person.
As to your thought that people don't fret over privacy is a bit misleading. I know lots of people via the WinExtra forums and IRC that do fret about their privacy and the erosion (as they see it) of it. I think that this idea of privacy not being important is currently a view held by a very small portion of Internet users. Hmm .. that is something for me to think about a little further - thanks :)
For example: I wanted to start a blog about family news so that I could share things with my parents and in-laws and other extended family members about what we were up to, and that potentially make connections with other Donaghes once Google found the site. My mother made some points about revealing too much to strangers about our family life: what if someone took advantage of information I thought was harmless to, say, figure out our address or something? But I still want to share that kind of stuff with my family. They're mostly techno-phobes or at least not very saavy... they are still getting the hang of logging into email and not using the Google search text box to type in URLs so the idea of creating a private social network is not going to fly... And by walling it up, then there's no chance other long lost family members could stumble onto it.
So I've struggled with the privacy issue because there is no easy way to designate levels of privacy and specify who should see what, especially if they're not willing/able to participate in whatever mechanism for controlling privacy levels I might choose. Solve that problem and you've fixed the internet.
I do remember the early "nobody knows you're a dog" days of the Internet--and of the BBS's that predated the Internet. We were all a bit younger then, and in my case the anonymity of the Internet contributed to my perceiving it as an escapist form of recreation.
I finished my schooling in 1998 and started working in 1999, roughly coinciding with when the Web became mainstream. Suddenly the Internet became less interesting to me as a source of entertainment and more interesting as a source of information and, increasingly, as a place to explore social / professional networking opportunities. And, most recently the Internet is a place where I publish and cultivate a reputation.
For these communicative purposes, anonymity is not only useless, it's actually harmful. When you're trying to build trust, the last thing you want is someone questioning whether you are who you say your are. And you certainly don't want anyone to be able to masquerade as you.
To be clear, there are times that I value privacy and anonymity. I don't publish my life stream online. In fact, the information I do publish is a controlled, public persona that is accurate but selective. I think you put it well: we have privacy by personal responsibility. We always did--only now, we learn about this responsibility far more quickly because of the efficiency of information flow.