ECONOMIC ASPECTS OF CYBERSECURITY. Cybersecurity Breaches are a Key Concern to Private and Public Sector Organizations

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1 ECONOMIC ASPECTS OF CYBERSECURITY Objecive: Provide an overview of sream of research by Gordon and Loeb on he economics of cybersecury. Marin P. Loeb Professor of Accouning & Informaion Assurance, and Deloe Faculy Fellow The Rober H. Smh School of Business Universy of Maryland Affiliae Professor in UMIACS Researcher in Maryland Cybersecury Cener June 10, 2014 ECONOMIC ASPECTS OF INFORMATION SECURITY (Research Agenda by Gordon, Loeb and ohers a he RH Smh School, UMD) A. Wha is he impac of cybersecury breaches on corporaions? B. How much should a firm inves in cybersecury (and how should hose funds be allocaed)? ************************************************************************* C. Informaion sharing D. Economic incenives for cybersecury invesmens in he privae secor E. Disclosure of cybersecury acivies on 10K repors filed wh he SEC F. Cybersecury insurance G. Informaion secury auds A. Wha is he impac of cybersecury breaches on corporaions? Cybersecury Breaches are a Key Concern o Privae and Public Secor Organizaions Economic Coss of Cybersecury Breaches Convenional Wisdom Need o Consider Implic and Explic Coss Our Sudies have Looked a he Impac of Breaches on Sock Marke Reurns (SMR) 3

2 A: Research Mehodology (Even Sudy) Even = Public Announcemen of a Cybersecruy Breach Esimae Reurns Model Even days 3 days Esimaion Period Tes Window: o see if here are abnormal reurns 4 A: Research Mehodology One-facor Model (Basic CAPM) Abnormal Reurns: R RF = a + b ( RM RF ) + ε i i AR = R RF ) [ aˆ + bˆ ( RM RF )] ( i i Cumulaive Abnormal Reurns: 2 CARi = AR, = 1 Average CAR across Firms: 1 N CARi N i = 1 CAR = R : firm s reurn, RF : risk-free rae, RM : marke s reurn b i ; he CAPM marke model s slope parameer (i.e., he sysemaic risk of he reurn for firm i, relaive o he reurn of he enire marke place, and ofen call he firm s bea) 5 A: Wha is he impac of cybersecury breaches on corporaions? Resuls of our sock marke reurns sudies Large percenage of breaches do no have significan impac on sock marke reurn of firm a. Sockholders have become oleran of breaches b. Many firms have srenghened heir remediaion plans, hereby subsanially reducing he cos of an average breach Breaches ha do have a significan impac on SMR can hreaen firm s survival 6

3 B. How much o inves in cybersecury? Characerisics of cybersecury invesmens: Cybersecury invesmens are cos savings projecs as opposed o a revenue generaing projec Benefs impossible o measure precisely: one would need o know wha losses would have been whou he cybersecury invesmen Exernalies: a firm s cyber invesmens affecs he cybersecury of oher firms, and vice versa Game heoreic aspecs: aackers and defenders Opimal amoun o inves (Gordon-Loeb Model) Vulnerabilies Producivy of invesmens Poenial loss 7 B: Opimal Amoun o Inves in Cybersecury (Gordon-Loeb Model) Expeced benefs of an invesmen in informaion secury, denoed as EBIS, are equal o he reducion in he firm's expeced loss aribuable o he exra secury. EBIS(z) = [v- S(z,v)] L [1] EBIS is wren above as a funcion of z, since he invesmen in informaion secury is he firm s only decision variable (v and L are parameers of he informaion se). The expeced ne benefs from an invesmen in informaion secury, denoed ENBIS equal EBIS less he cos of he invesmen, or: ENBIS(z) = [v -S(z,v)]L -z [2] Maximizing [2] is equivalen o minimizing: S(z,v)L +z [3] Inerior maximum z*>0 is characerized by he firs-order condion for maximizing [2] (or minimizing [3]) : -S z (z *,v)l =1 [4] 8 Benefs and Cos of an Invesmen in Informaion Secury vl $ Expeced Benefs of Invesmen =(v-s(z,v))l Cos of Invesmen 45 0 z* Level of invesmen in informaion secury vl z 9

4 B: Resuls of Gordon-Loeb Model * Opimal level of Informaion Secury Invesmen Does No Always Increase wh he Level of Vulnerabily For a Wide Range of Circumsances, Firms should Inves 37% of Expeced Loss * Model has been generalized by mahemaicians in papers by Lelarge and a paper by Barishnikov Gordon-Loeb model has been feaured in he Wall Sree Journal and he Financial Times

5 Concluding Commens 1. Many cybersecury breaches do no have a significan impac on firms, bu some can hreaen he survival of a firm. 2. Under a wide range of circumsances, do no inves more han 37% of expeced loss. 3. Cybersecury soluions should be viewed in he conex of economic decision-making. 13 SELECTED REFERENCES Baryshnikov, Y IT secury invesmen and Gordon-Loeb s 1/e rule Workshop on Economics and Informaion Secury, Berlin, available a hp:// weis2012.econinfosec.org/papers Bodin, L., L.A. Gordon and M.P. Loeb Informaion Secury and Risk Managemen, Communicaion of he ACM, Vol. 51, No. 4, pp Campbell, K., L.A. Gordon, M.P. Loeb and L. Zhou The Economic Cos of Publicly Announced Informaion Secury Breaches: Empirical Evidence from he Sock Marke, Journal of Compuer Secury, Vol. 11, No.3, pp Gordon, L.A. and M.P. Loeb Managing Cybersecury Resources: A Cos-Benef Perspecive (McGraw-Hill). Gordon, L.A. and M.P. Loeb Informaion Secury Budgeing Process: An Empirical Sudy, Communicaions of he ACM, Jan., pp Gordon, L.A., M.P. Loeb Economic Aspecs of Informaion secury: An Emerging Field of Research, Informaion Sysem Froniers, Vol. 8, No. 5, pp Gordon, L.A. and M.P. Loeb The Economics of Informaion Secury Invesmen, ACM Transacions on Informaion and Sysem Secury, November, pp (reprined in Economics of Informaion Secury, 2004). Gordon, L.A. and M.P. Loeb Reurn on Informaion Secury Invesmens: Myhs vs. Realy, Sraegic Finance, November, pp Gordon, L.A., M.P. Loeb, and W. Lucyshyn Sharing Informaion on Compuer Sysems Secury: An Economic Analysis, Journal of Accouning and Public Policy, Vol. 22, No. 6, pp , Gordon, L.A., M.P. Loeb, and W. Lucyshyn Informaion Secury Expendures and Real Opions: A Wa-and-See Approach, Compuer Secury Journal, Vol. 19, No. 2, pp Gordon, L.A., M.P Loeb, W. Lucyshyn, and R. Richardson CSI/FBI Compuer Crime and Secury Survey, Compuer Secury Journal, Summer. Gordon, L.A., M.P. Loeb and T. Sohail Marke Value of Volunary Disclosures Concerning Informaion Secury, MIS Quarerly, Sepember, pp Gordon, L.A., M.P. Loeb, and T. Sohail A Framework for Using Insurance for Cyber-Risk Managemen, Communicaions of he ACM, March, pp Gordon, L.A., M.P. Loeb, T. Sohail. C-Y Tseng and L. Zhou Cybersecury Capal Allocaion and Managemen Conrol Sysems, European Accouning Review, Vol. 17, No. 2, pp Gordon, L.A., M.P. Loeb, and L. Zhou The Impac of Informaion Secury Breaches: Has There Been a Downward Shif in Coss? Journal of Compuer Secury, 19(1), Lelarge, M Coordinaion in nework secury games: A monoone comparaive saics approach. Seleced Areas in Communicaions, IEE Journal on 30(11),

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