Posts tagged strategy

Boomtime: Risk as Economics (Notes)


Thank you, internets, for all the feedback I’ve gotten on BoomTime: Risk As Economics. Of course my slides are nigh indecipherable without my voiceover, and my notes didn’t make it to the slideshare, so here are some notes to fill in (some) of the blanks until the video hits YouTube (SiRA members will get early access to SiRAcon15 videos via the SiRA Discourse forum, BTW). (You will want to look at the notes and the slides side by side, probably, as one doesn’t make sense w/o the other.)

An intro here is that in addition to being a product manager specializing in designing large-scale, data-driven security/anti-fraud/anti-abuse automation (yep, that’s a thing), I’m also an economics nerd. (Currently working on an MS in Applied Econ at JHU). Given my background in payments, and a general penchant for “following the money”, framing technology problems on platforms through an economic/financial lens is second nature.

Themes of Security Economics

A list of typical themes one hears when discussing information security & economics: within businesses we are requested to talk about exposures and threats in terms of financial impact, or consider the financial (money) drivers. Also the theme of information asymmetries (Market for Lemons) is a big theme of information economics and of software markets in general: when information about quality of a product is difficult to find, that lack of transparency drives down prices, and we get less incentives to improve quality. (Ask me questions about market signals as a mechanism for correcting information asymmetries.) “Make it more expensive for the attacker” or “don’t outrun the bear, outrun the guy next to you” is also an idea that gets raised. Game theory, concepts of quantifying “risk” (exposure, tolerance), markets for exploits & vulns is a hot topic at the moment, as is behavioral economics and all things related to incentive design – gamification being the most buzzwordy example, perhaps, but framing as a method for improving consumers’ ability to make good choices related to privacy preferences also something that has come up a bit lately in security economics research. Anyway, these are some themes that tend to be repeated in recent research literature.


Risk: Models, Frameworks, Diagrams, & other Unicorn-lair maps


Risk modeling, while it sounds specific, is actually super-contextual. I think my own perspective on the topic (the different types of modeling, what they are good for) was best summed-up in a paper/presentation combo I worked on with Alex Hutton for Black Hat & SOURCE Barcelona in 2010. Probably video from Barcelona is the best reference if you want to look that up (yes, lazy blogger is lazy), but let me summarize by the (from my perspective) three general purposes of risk models:

  • Design: Aligned most with system theory. The models try to summarize the inputs (threats, vulns, motives, protections) and the outputs (generally, loss and in some cases “gains”) of a system, based on some understanding of mechanisms in the system that will allow or impede inputs as catalysts/diffusers of outputs. Generally I would lump attack tree modeling and threat modeling into this family, just a different perspective on a system as a network architecture or design of a protocol, software, or network stack. Outside of risk/security, a general “business model” is equivalent, which attempts to clarify the scope, size, cost,and expected performance of the project.
  • Management: Aligned most with the security/risk metrics movement, and (to some extent) aligned with “GRC”-type work, management-focused risk models are set-up to measure and estimate performance, i.e. to answer a questions about “how well are controls mitigating risk” or “to how much risk are we exposed”. One could think of the output of the design phase being a view as to what types of outcomes to expect, and then the management phase will provide a view on what outcomes are actually being generated by a system/organization. Outside of risk/security, a good example of a management model is the adoption of annual/quarterly/ongoing quality goals, and regular review of performance against targets.
  • Operations: Operational models are a different beast. And my favorite. Operational models aren’t trying to describe a system, they are embedded into the system, they influence the activities taking place in the system, often in real-time. I suppose any set of heuristics could be included in this definition, including ACL’s. I prefer to focus on models that take multiple variables into consideration – not necessarily complex variables – and generate scores or vectors of scores. Why? Because generally the quality of decision (model fit, accuracy, performance, cost/benefit trade-off) will be more optimized, i.e. better. Outside of risk/security, a good example is dynamic traffic routing used in intelligent transport systems.

“Framework” is another term that I’ve heard used in a number of different ways but it seems to really be an explanation of a selected approach to modeling, and then some bits on process – how models and processes will be applied in an ongoing approach to administer the system. Even Wikipedia shies away from an over-arching definition, the closest we get is “conceptual framework“: described as an outline of possible courses of action or to present a preferred approach to an idea or thought. They suggest we also look at the definition for scaffolding: “a structure used as a guide to build something” – (yes, thank you, I want us to start discussing risk scaffolding when we review architecture, pls)


Impressionist Risk Management, or, the Whole Insurance Policy Fallacy


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.

Venice. Yeah. Try and get flood insurance *there*.

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.


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