Posts tagged probability
Over the last year I’ve started reviewing game theory in more depth, looking for some models I can use to understand system management (vis a vis risk) better. Game theory is one of the more interesting branches of economics for me, but I don’t actually have a great intuition for it yet (I really have to work at absorbing the material). Since it doesn’t come super-naturally to me, I’m particularly proud of the presentation I gave at SOURCE Boston last year: Games We Play: Defenses and Disincentives (description here). Luckily, there is a good video of the presentation, because when I wanted to expand out the presentation a few months later, my notes were totally undecipherable. 🙂
Since I am still a proponent of applied risk analytics (as in my talk at Brucon this year: A Million Mousetraps: Using Big Data and Little Loops to Build Better Defenses (description here), I’ll never be able to escape behaviorally-driven defenses, but even with the power of big data behind us it feels like we defenders often find ourselves playing the wrong game. I don’t disagree the deck might be stacked against us, but we might be able to at least take control of the game board a little better.
Essentially — I am interested in we how might be able to adjust incentives in order to improve both risk reduction, whether from a fraud, security, or general operational dynamics perspective. Fraud reduction typically considers incentives and system design rather vaguely (not in a systematic way, except maybe in the case of authentication), and instead relies almost exclusively on behavioralist approaches (as typified by the complex predictive models launched looking for patterns in real time. I have been wondering for a while if we can “change the game” and get improved results.
Risk management at a systemic level is complicated enough that many organizations deem it practically impossible. The mistake many risk managers make is to try to identify every potential exposure in the system, every possible scenario that could lead to loss. This is how risk managers go crazy, since not even Kafka can describe every potential possibility. Risk management as a discipline does line up nicely with probability theory, but holistic approaches to risk management deviate from the sister science of insurance.
Insurance presents expected value of specific events taking place: what is the probability this car and this driver will be involved in a collision — and how much will the resulting damage cost to replace/fix? Factors include the age and quality of the car as well as the age and quality of the driver, average distance driven per day, geographic area and traffic conditions. The value of the vehicle is estimated, ranges of collision costs assumed. Flood insurance is similarly specific: what is the probability this property will sustain damage in flood conditions — and how much will it cost to protect/fix the property? Average precipitation, elevation, foundation quality, assessed property value are all factored into the decision.
As complicated as actuarial science is, insurance can be written because insurance is specific. Risk management is not specific: it is systemic.