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Research Note—A Value-at-Risk Approach to Information Security Investment

College of Business Administration, University of Texas at Arlington, Arlington, Texas 76019
Bryant University, Smithfield, Rhode Island 02917
School of Management, State University of New York at Buffalo, Buffalo, New York 14260
jwang{at}uta.edu
achaudhu{at}bryant.edu
mgmtrao{at}buffalo.edu

Information security investment has been getting increasing attention in recent years. Various methods have been proposed to determine the effective level of security investment. However, traditional expected value methods (such as annual loss expectancy) cannot fully characterize the information security risk confronted by organizations, considering some extremal yet perhaps relatively rare cases in which a security failure may be critical and cause high losses. In this research note we introduce the concept of value-at-risk to measure the risk of daily losses an organization faces due to security exploits and use extreme value analysis to quantitatively estimate the value at risk. We collect a set of internal daily activity data from a large financial institution in the northeast United States and then simulate its daily losses with information based on data snapshots and interviews with security managers at the institution. We illustrate our methods using these simulated daily losses. With this approach, decision makers can make a proper investment choice based on their own risk preference instead of pursuing a solution that minimizes only the expected cost.

Key Words: information assurance; security investment; value-at-risk (VaR); extreme value analysis
History: This paper was received on February 1, 2006.