Does Risk Management Make Sense?

By Bruce Schneier
Information Security
October 2008

This essay appeared as the first half of a point-counterpoint with Marcus Ranum. Marcus's half is here.

We engage in risk management all the time, but it only makes sense if we do it right.

"Risk management" is just a fancy term for the cost-benefit tradeoff associated with any security decision. It's what we do when we react to fear, or try to make ourselves feel secure. It's the fight-or-flight reflex that evolved in primitive fish and remains in all vertebrates. It's instinctual, intuitive and fundamental to life, and one of the brain's primary functions.

Some have hypothesized that humans have a "risk thermostat" that tries to maintain some optimal risk level. It explains why we drive our motorcycles faster when we wear a helmet, or are more likely to take up smoking during wartime. It's our natural risk management in action.

The problem is our brains are intuitively suited to the sorts of risk management decisions endemic to living in small family groups in the East African highlands in 100,000 BC, and not to living in the New York City of 2008. We make systematic risk management mistakes -- miscalculating the probability of rare events, reacting more to stories than data, responding to the feeling of security rather than reality, and making decisions based on irrelevant context. And that risk cockpit of ours? It's not nearly as finely tuned as we might like it to be.

Like a rabbit that responds to an oncoming car with its default predator avoidance behavior -- dart left, dart right, dart left, and at the last moment jump -- instead of just getting out of the way, our Stone Age intuition doesn't serve us well in a modern technological society. So when we in the security industry use the term "risk management," we don't want you to do it by trusting your gut. We want you to do risk management consciously and intelligently, to analyze the tradeoff and make the best decision.

This means balancing the costs and benefits of any security decision -- buying and installing a new technology, implementing a new procedure or forgoing a common precaution. It means allocating a security budget to mitigate different risks by different amounts. It means buying insurance to transfer some risks to others. It's what businesses do, all the time, about everything. IT security has its own risk management decisions, based on the threats and the technologies.

There's never just one risk, of course, and bad risk management decisions often carry an underlying tradeoff. Terrorism policy in the U.S. is based more on politics than actual security risk, but the politicians who make these decisions are concerned about the risks of not being re-elected.

Many corporate security decisions are made to mitigate the risk of lawsuits rather than address the risk of any actual security breach. And individuals make risk management decisions that consider not only the risks to the corporation, but the risks to their departments' budgets, and to their careers.

You can't completely remove emotion from risk management decisions, but the best way to keep risk management focused on the data is to formalize the methodology. That's what companies that manage risk for a living -- insurance companies, financial trading firms and arbitrageurs -- try to do. They try to replace intuition with models, and hunches with mathematics.

The problem in the security world is we often lack the data to do risk management well. Technological risks are complicated and subtle. We don't know how well our network security will keep the bad guys out, and we don't know the cost to the company if we don't keep them out. And the risks change all the time, making the calculations even harder. But this doesn't mean we shouldn't try.

You can't avoid risk management; it's fundamental to business just as to life. The question is whether you're going to try to use data or whether you're going to just react based on emotions, hunches and anecdotes.

earlier essay: Airport Pasta-Sauce Interdiction Considered Harmful
later essay: The Seven Habits of Highly Ineffective Terrorists
categories: Business of Security, Psychology of Security
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Photo of Bruce Schneier by Per Ervland.

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