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Optimal Security Investments and Extreme Risk

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  • Hamid Mohtadi
  • Swati Agiwal

Abstract

In the aftermath of 9/11, concern over security increased dramatically in both the public and the private sector. Yet, no clear algorithm exists to inform firms on the amount and the timing of security investments to mitigate the impact of catastrophic risks. The goal of this article is to devise an optimum investment strategy for firms to mitigate exposure to catastrophic risks, focusing on how much to invest and when to invest. The latter question addresses the issue of whether postponing a risk mitigating decision is an optimal strategy or not. Accordingly, we develop and estimate both a one‐period model and a multiperiod model within the framework of extreme value theory (EVT). We calibrate these models using probability measures for catastrophic terrorism risks associated with attacks on the food sector. We then compare our findings with the purchase of catastrophic risk insurance.

Suggested Citation

  • Hamid Mohtadi & Swati Agiwal, 2012. "Optimal Security Investments and Extreme Risk," Risk Analysis, John Wiley & Sons, vol. 32(8), pages 1309-1325, August.
    • Handle: RePEc:wly:riskan:v:32:y:2012:i:8:p:1309-1325
    DOI: 10.1111/j.1539-6924.2012.01849.x
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    References listed on IDEAS

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    1. Howard Kunreuther & Erwann Michel-Kerjan & Beverly Porter, 2003. "Assessing, Managing, and Financing Extreme Events: Dealing with Terrorism," NBER Working Papers 10179, National Bureau of Economic Research, Inc.
    2. Kenneth T. Bogen & Edwin D. Jones, 2006. "Risks of Mortality and Morbidity from Worldwide Terrorism: 1968–2004," Risk Analysis, John Wiley & Sons, vol. 26(1), pages 45-59, February.
    3. Neil Johnson & Michael Spagat & Jorge A. Restrepo & Nicolás Suárez, 2005. "From old wars to new wars and global terrorism," Documentos de Economía 2745, Universidad Javeriana - Bogotá.
    4. Kjell Hausken, 2006. "Returns to information security investment: The effect of alternative information security breach functions on optimal investment and sensitivity to vulnerability," Information Systems Frontiers, Springer, vol. 8(5), pages 338-349, December.
    5. Hamid Mohtadi & Antu Panini Murshid, 2009. "Risk Analysis of Chemical, Biological, or Radionuclear Threats: Implications for Food Security," Risk Analysis, John Wiley & Sons, vol. 29(9), pages 1317-1335, September.
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    Cited by:

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