Managing Information Risk and the Economics of Security

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Full Title of Reference

Managing Information Risk and the Economics of Security

Full Citation

M. Eric Johnson, Managing Information Risk and the Economics of Security (2008).

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Key Words

Antivirus, Botnet, Cyber Crime, Cyber Security as an Externality, Disclosure Policy, Honeypot, Information Asymmetries, Internet Service Providers, Malware, Notice and Take-down, Patching, Phishing, Risk Modeling, SPAM, State Affiliation, Tragedy of Commons, Transparency


The lifeblood of the global economy, information has become a source of growing risk as more firms maintain information online. With risks now fueled by sophisticated, organized, malicious groups, information security requires not only technology, but a clear understanding of potential risks, decision-making behaviors, and metrics for evaluating business and policy options.

Managing Information Risk and the Economics of Security, an edited volume contributed by well-established researchers in the field worldwide, presents the latest research on economics driving both the risks and the solutions. Covering the implications of policy within firms and across countries, this volume provides managers and policy makers with new thinking on how to manage risk. The chapters are broken down into five major sections:

  1. Cyber Policy and Regulation
    • Nonbanks and Risk in Retail Payments: EU and U.S.

      This chapter documents the importance of nonbanks in retail payments in the United States and in 15 European countries and analyses the implications of the importance and multiple roles played by nonbanks on retail payment risks. Nonbanks play multiple roles along the entire payment processing chain. They are prominent in the United States and their presence is high and growing in Europe as well, although there are differences among the various countries and payments classes. The presence of nonbanks has shifted the locus of risks in retail payments towards greater relevance of operational and fraud risk. The chapter reviews the main safeguards in place, and concludes that there may be a need to reconsider some of them in view of the growing role of nonbanks and of the global reach of risks in the electronic era.

    • Security Economics and European Policy

      In September 2007, we were awarded a contract by the European Network and Information Security Agency (ENISA) to investigate failures in the market for secure electronic communications within the European Union, and come up with policy recommendations. In the process, we spoke to a large number of stakeholders, and held a consultative meeting in December 2007 in Brussels to present draft proposals, which established most had wide stakeholder support. The formal outcome of our work was a detailed report, “Security Economics and the Internal Market”, published by ENISA in March 2008. This chapter presents a much abridged version: in it, we present the recommendations we made, along with a summary of our reasoning.

  2. Risk Management and Security Investment
    • BORIS – Business Oriented management of Information Security

      The present chapter aims to successfully deal with the needs of information security functions by providing a management tool which links business and information security objectives. In the past terms, information security has fortunately become a top management topic due to the recognition of the continuously increasing dependencies of the overall business success in secure information and information processing technologies and means. While the focus of information security management primarily lay on the implementation of solutions to assure the achievement of the enterprises’ security objectives and their management, the business oriented management objectives were typically not regarded as major concern. Today, information security management executives are severely confronted with a different situation. An increasing pressure forces them to manage the security measures not only using their security, but also business glasses. To handle this challenge, a framework is presented in this chapter. It supports any information security functions with a strong economic focus, whereby it specifically links business and information security objectives. The core of the presented methodology has proven to be reliable, user friendly, consistent and precise under real conditions over several years.

    • Productivity Space of Information Security in an Extension of the Gordon-Loeb’s Investment Model

      Information security engineers provide some countermeasures so that attacks will fail. This is vulnerability reduction. In addition, they provide other countermeasures so that attacks will not occur. This is threat reduction. In order to study how the optimal investment for information security is influenced by these reductions, this chapter introduces a productivity space of information security. In the same manner as in the Gordon-Loeb model, where vulnerability reduction is only considered, I suppose a productivity of information security characterizes economic effects of information security investment. In particular, I consider a productivity regarding threat reduction as well as a productivity regarding vulnerability reduction, and investigate a two-dimensional space formed by the two productivities. The investigation shows that the productivity space is divided into three areas: the no-investment area where both the productivities are low, the mid-vulnerability intensive area where the vulnerability reduction productivity is high but the threat reduction productivity is low, and the high-vulnerability intensive area where the threat reduction productivity is high.

    • Communicating the Economic Value of Security Investments; Value at Security Risk
    • The information and data security communities and their individual practitioners have long experienced the pedagogical difficulties in communicating to management or funding bodies the importance and relevance of sufficient investments in information and data security.

      One reason for this pedagogical failure is that the highly specialized security domain is difficult to penetrate for the average manager with a background in business administration or economics. Consequently, the entities and metrics used by the security community to evaluate security risks and their consequences usually tell very little to people involved in security investment decisions.

      Historically, Return on Investment (RoI) has been used for this purpose. However, RoI is not an ideal entity to use, since it generates misunderstanding and misinterpretation. Companies and enterprises already have tools, methods and metrics to express risk levels and their economic consequences: we refer to Value-at-Risk and Value-at-Risk-type metrics.

      This contribution transforms or transfers entities and metrics used by the information and data security communities into Value-at-Risk-type entities and metrics. This will allow management to understand, compare and evaluate security risks and their economic consequences with risks generated by other sources, strategies or investment decisions and givemanagement a firmer and more rational basis for security investment decisions.

  3. Technology and Policy Adoption
    • Modelling the Human and Technological Costs and Benefits of USB Memory Stick Security

      Organizations deploy systems technologies in order to support their operations and achieve their business objectives. In so doing, they encounter tensions between the confidentiality, integrity, and availability of information, and must make investments in information security measures to address these concerns. We discuss how a macroeconomics-inspired model, analogous to models of interest rate policy used by central banks, can be used to understand trade-offs between investments against threats to confidentiality and availability. We investigate how such a model might be formulated by constructing a process model, based on empirically obtained data, of the use of USB memory sticks by employees of a financial services company.

    • The Value of Escalation and Incentives in Managing Information Access

      Managing information access within large enterprises is increasingly challenging. With thousands of employees accessing thousands of applications and data sources, managers strive to ensure the employees can access the information they need to create value while protecting information from misuse. We examine an information governance approach based on controls and incentives, where employees’ self-interested behavior can result in firm-optimal use of information. Using insights gained from a game-theoretic model, we illustrate how an incentives-based policy with escalation can control both over and under-entitlement while maintaining the flexibility.

  4. Combating Cybercrime
    • Reinterpreting the Disclosure Debate for Web Infections

      Internet end users increasingly face threats of compromise by visiting seemingly innocuous websites that are themselves compromised by malicious actors. These compromised machines are then incorporated into bot networks that perpetuate further attacks on the Internet. Google attempts to protect users of its search products from these hidden threats by publicly disclosing these infections in interstitial warning pages behind the results. This chapter seeks to explore the effects of this policy on the economic ecosystem of webmasters, web hosts, and attackers by analyzing the experiences and data of the StopBadware project. The StopBadware project manages the appeals process whereby websites whose infections have been disclosed by Google get fixed and unquarantined. Our results show that, in the absence of disclosure and quarantine, certain classes of webmasters and hosting providers are not incentivized to secure their platforms and websites and that the malware industry is sophisticated and adapts to this reality. A delayed disclosure policy may be appropriate for traditional software products. However, in the web infection space, silence during this period leads to further infection since the attack is already in progress. We relate specific examples where disclosure has had beneficial effects, and further support this conclusion by comparing infection rates in the U.S. where Google has high penetration to China where its market penetration rate is much lower.

    • The Impact of Incentives on Notice and Take-down

      We consider a number of notice and take-down regimes for Internet content. These differ in the incentives for removal, the legal framework for compelling action, and the speed at which material is removed. By measuring how quickly various types of content are removed, we determine that the requester’s incentives outweigh all other factors, from the penalties available, to the methods used to obstruct take-down.

    • Studying Malicious Websites and the Underground Economy on the Chinese Web

      The World Wide Web gains more and more popularity within China with more than 1.31 million websites on the Chinese Web in June 2007. Driven by the economic profits, cyber criminals are on the rise and use the Web to exploit innocent users. In fact, a real underground black market with thousands of participants has developed, which brings together malicious users who trade exploits, malware, virtual assets, stolen credentials, and more. In this chapter, we provide a detailed overview of this underground black market and present a model to describe the market. We substantiate our model with the help of measurement results within the Chinese Web. First, we show that the amount of virtual assets traded on this underground market is huge. Second, our research proves that a significant amount of websites within China’s part of the Web contain some kind of malicious content: our measurements reveal that about 1.49% of the examined sites contain malicious content that tries to attack the visitor’s browser.

    • Botnet Economics: Uncertainty Matters

      Botnets have become an increasing security concern in today’s Internet. Thus far the mitigation to botnet attacks is a never ending arms race focusing on technical approaches. In this chapter, we model botnet-related cybercrimes as a result of profit-maximizing decision-making from the perspectives of both botnet masters and renters/attackers. From this economic model, we can understand the effective rental size and the optimal botnet size that can maximize the profits of botnet masters and attackers. We propose the idea of using virtual bots (honeypots running on virtual machines) to create uncertainty in the level of botnet attacks. The uncertainty introduced by virtual bots has a deep impact on the profit gains on the botnet market. With decreasing profitability, botnet-related attacks such as DDoS are reduced if not eliminated from the root cause, i.e. economic incentives.

    • Cyber Insurance as an Incentive for Internet Security

      Managing security risks in the Internet has, so far, mostly involved methods to reduce the risks and the severity of the damages. Those methods (such as firewalls, intrusion detection and prevention, etc) reduce but do not eliminate risk, and the question remains on how to handle the residual risk. In this chapter, we consider the problem of whether buying insurance to protect the Internet and its users from security risks makes sense, and if so, identifying specific benefits of insurance and designing appropriate insurance policies.

      Using insurance in the Internet raises several questions because entities in the Internet face correlated risks, which means that insurance claims will likely be correlated, making those entities less attractive to insurance companies. Furthermore, risks are interdependent, meaning that the decision by an entity to invest in security and self-protect affects the risk faced by others. We analyze the impact of these externalities on the security investments of the users using simple models that combine recent ideas from risk theory and network modeling.

      Our key result is that using insurance would increase the security in the Internet. Specifically, we show that the adoption of security investments follows a threshold or tipping point dynamics, and that insurance is a powerful incentive mechanism which pushes entities over the threshold into a desirable state where they invest in self-protection.

      Given its many benefits, we argue that insurance should become an important component of risk management in the Internet, and discuss its impact on Internet mechanisms and architecture.

  5. Privacy and Trust
    • Conformity or Diversity: Social Implications of Transparency in Personal Data Processing

      Consider the hypothetical situation of a society with virtually unconstrained storage and exchange of personal information, and shameless exploitation thereof for decision making, for example in contract negotiation. In this chapter we develop a stylised formal model to tackle the question if public knowledge about how exactly personal information is used in decision making changes aggregate behaviour. Simulation results suggest a slightly positive relationship between transparency and conformity, i.e., people tend to behave alike. This has implications on the common conjecture that collection and processing of personal information is tolerable as long as transparency is warranted.

    • Is Distributed Trust More Trustworthy?

      We provide a comparative economic analysis of a traditional trusted mediator, e.g. an auction or a consultancy house, and a mediator based on distributed cryptography (threshold trust). The two institutions are compared in a supergame that compares the immediate gain from corruption with future losses if corruption is detected. Corruption with threshold trust requires cooperation among T +1 out of N preassigned independent third parties, which results in relative higher detection rates. If all incidents of corruption are detected, traditional trust is the most trustworthy institution. This follows from the fundamental division problem that gain from corruption is divided among less than honest gain with threshold trust. On the other hand, if the threshold is T = N −1, threshold trust is the most trustworthy institution for any detection rate less than 1. In all intermediate situations, determining the most trustworthy institution depends on the institutional setup and payoffs. However, the required cooperation with threshold trust allows a public authority to enhance trust in various ways. Furthermore, conflicting interests may cause a TTP based on threshold trust to breakdown after detected corruption, and thereby make the punishment more harsh and threshold trust more trustworthy.

Managing Information Risk and the Economics of Security is designed for managers, policy makers, and researchers focusing on economics of information security, as well as for advanced-level students in computer science, business management and economics.

Additional Notes and Highlights

Expertise Required: Economics - High

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