It Is Too Hard Or Impossible…

July 15, 2014

** Admitting that you don’t know how to make the sausage will always cast doubt on the quality of the sausage you do produce. **

One of my personal risk management aggravations relates to risk management professionals that claim it is too hard or impossible to quantify the frequency or severity of loss. First, there is the irony that we operate in a problem space of uncertainty and then make absolute statements that something cannot be done. When I witness this type of uttering, I will often challenge the person on the spot – keeping in mind the audience – in an effort to pull that person off the edge of mental failure. And make no mistake, I struggle with quantification as well – but to what degree I share that with stakeholders or peers is an aspect of professional perception that I intentionally manage. Reflecting on my own experiences and interactions with others, I want to share some quick litmus tests I use when addressing the “it is too hard or impossible” challenges.

1. Problem Scoping. Have I scoped the problem or challenge too broadly? Sometimes we take these super-big, gnarly problem spaces and become fascinated with them without trying to deconstruct the problem into more manageable chunks. Often, once you begin reducing your scope, the variables that drive frequency or severity will emerge.

2. Subject Matter Experts. This is one litmus test that I have to attribute to Jack Jones and the FAIR methodology. Often, we are not the best person to be making subject matter estimates for the variables that factor into the overall risk. The closer you get to the true experts and extract their knowledge for your analysis, the more robust and meaningful your analysis will become. In addition, leveraging subject matter experts fosters collaboration and in some cases innovation where leaders of unrelated value chains realize there is opportunity to reduce risk across one or more chains.

3. Extremes and Calibration. Once again, I have Jack Jones to thank for this litmus test and Doug Hubbard as well. Recently, a co-worker declared something was impossible to measure (workforce, increased expense related). After his “too hard” declaration, I simply asked: “Will it cost us more than $1BN?” The question stunned my co-worker, which resulted in a “Of course not!” to which I replied “It looks like it is greater than zero and less than 1 billion, we are making progress!” Here is the point, we can tease extremes and leverage calibration techniques to narrow down our uncertainty and define variable ranges versus anchoring in on a single, discreet value.

4. Am I Trying Hard Enough. This is a no-brainer but unfortunately I feel too many of us do not try hard enough. A simple phone call, email or even well crafted Google query can quickly provide useful information that in turn reduces our uncertainty.

These are just a few “litmus tests” you can use to evaluate if an estimation or scenario is too hard to quantify. But here is the deal, as risk professionals it is expected that we deal with tough things so our decision makers don’t have too.


Wonder Twin Powers Activate…

March 7, 2013

…form of risk professional. I really miss blogging. The last year or so has been a complete gaggle from a relocation and time-management perspective. So naturally, discretionary activities – like blogging – take a back seat. I want to share a few quick thoughts around the topic of transitioning from a pure information technology / information security mindset to a risk management professional mindset.

1. Embrace the Gray Space. Information technology is all about bits, bytes, ones and zeros. Things either work or don’t work; it is either black or white, it is either good or bad – you get the point. In the discipline of risk management we are interested in everything between the two extremes. It is within this space where there is information to allow decision makers to make more well informed decisions.

2. Embrace Uncertainty. Intuitively, the concept of uncertainty is contrary to a lot of information technology concepts. Foundational risk concepts revolve around understanding and managing uncertainty and infusing it into our analysis / conversation with decision makers. There is no reason why this cannot be done within information risk management programs as well.  At first, it may feel awkward as an IT professional to admit to a leader that there is uncertainty inherent within some of the variables included in your analysis. However, what you will find – assuming you can clearly articulate your analysis – is that infusing the topic of uncertainty in your conversations and analysis has indirect benefits. Such an approach implies rigor, maturity and builds confidence with the decision maker.

3. Find New Friends. Notice I did not type find different friends. There is an old adage that goes something to the effect of “you are who you surround yourself with”. Let me change this up: “you are who you are learning from”. You want to learn risk management? Indulge yourself in non-IT risk management knowledge sources, learn centuries old principles of risk management and then begin applying what you have learned to the information technology / information security problem space. Here are just a few places to begin:

b. Risk Management Magazine
c. The Risk Management Society
d. Property & Casualty  – Enterprise Risk Management

4. Change Your Thinking. This is going to sound heretical but bear with me. Stop thinking like an IT professional and begin thinking like a business and a risk management professional. Identify and follow the money trails for the various risk management problem spaces you are dealing with. Think like a commercial insurer. An entire industry exists to reduce the uncertainty associated with technology-related, operational risk – when bad things happen. Thus, learn how commercial insurers think so you can manage risk more effectively without having to overspend on third party risk financing products – as well as manage risk in such a way that can tie back to the financials – feelings and emotions. This is why I am so on-board with the AICPCU’s Associate in Risk Management (ARM) professional designation. You can also check out the FAIR risk measurement methodology which is also very useful for associating loss forms to adverse events which can also help tell the story around financial consequences.

5. Don’t Die On That Hill. I have to thank my new boss for this advice. Choose your risk management battles wisely and in the heat of the conversation ask yourself if you need to die on this hill. Not all of our conversations with decision makers, leaders or even between ourselves – as dear colleagues – is easy. It is way too easy for passion to get in the way of progress and influencing. Often, if you find yourself “on the hill” asking if you need to die – something has gone terribly wrong. Instead of dying and ruining a long term relationship – take a few steps back, get more information that will help in the situation, regroup and attack again. This is an example of being a quiet professional.

That is all for now. Take care.

OpenPERT – A FREE Add-In for Microsoft Office Excel

August 15, 2011

INTRODUCTION. In early June of this year, Jay Jacobs and I started having a long email / phone call discussion about risk modeling, model comparisons, descriptive statistics, and risk management in general. At some point in our conversation the topic of Excel add-ins came up and how nice it would be to NOT have to rely upon 3rd party add-ins that cost between hundreds and thousands of dollars to acquire. You can sort of think of the 80-20 rule when it comes to out of the box Excel functionality – though it is probably more like 95-5 depending on your profession – most of the functionality you need to perform analysis is there. However, there are at least two capabilities not included in Excel that are useful for risk modeling and analysis: the betaPERT distribution and Monte Carlo simulation. Thus,  the need for costly 3rd-party add-ins or a free alternative, the OpenPERT add-in.

ABOUT BETAPERT. You can get very thorough explanations about  the betaPERT distribution here, here, and here. What follows is the ‘cliff notes’ version. The betaPERT distribution is often used for modeling subject matter expert estimates in scenarios where there is no data or not enough of it. The underlying distribution is the beta distribution (which is included in Microsoft Office Excel).  If we can over-simply and define a distribution as a collection or range of values – the betaPERT distribution when initially used with three values, such as minimum, most likely (think mode) and maximum values will create a distribution of values (output) that can then be used for statistical analysis and modeling. By introducing a fourth parameter – which I will refer to as confidence, regarding the ‘most likely’ estimate – we can account for the kurtosis – or peakedness – of the distribution.

WHO USES BETAPERT? There are a few professions and disciplines that leverage the betaPERT distribution:

Project Management – The project management profession is most often associated with betaPERT. PERT stands for Program (or Project) Evaluation and Review Technique. PERT was developed by the Navy and Booz-Allen-Hamilton back in the 1950’s (ref.1; see below ) – as part of the Polaris missile program. Anyway, it is often used today in project management for project / task planning and I believe it is covered as part of the PMP certification curriculum.

Risk Analysis / Modeling – There are some risk analysis scenarios where due to a lack of data, estimates are used to bring form to components of scenarios that factor into risk. The FAIR methodology – specifically some tools that leverage the FAIR methodology as applied to IT risk – is such an example of using betaPERT for risk analysis and risk modeling.

Ad-Hoc Analysis – There are many times where having access to a distribution like betaPERT is useful outside the disciplines listed above. For example, if a baker is looking to compare the price of her/his product with the rest of the market – data could be collected, a distribution created, and analysis could occur. Or, maybe a church is analyzing its year to year growth and wants to create a dynamic model that accounts for both probable growth and shrinkage – betaPERT can help with that as well.

OPENPERT ADD-IN FOR MICROSOFT OFFICE EXCEL. Jay and I developed the OpenPERT add-in as an alternative to paying money to leverage the betaPERT distribution. Of course, we underestimated the complexity of not only creating an Excel add-in but also working with the distribution itself and specific cases where divide by zero errors can occur. That said, we are very pleased with version 1.0 of OpenPERT and are excited about future enhancements as well as releasing examples of problem scenarios that are better understood with betaPERT analysis. Version 1.0 has been tested on Microsoft Office Excel 2007 and 2010; on both 32 bit and 64 bit Microsoft Windows operating systems. Version 1.0 of OpenPERT is not supported on ANY Microsoft Office for Mac products.

The project home of OpenPERT is here.

The downloads page is here. Even if you are familiar with the betaPERT distribution, please read the reference guide before installing and using the OpenPERT add-in.

Your feedback is welcome via

Finally – On behalf of Jay and myself – a special thank you to members of the Society of Information Risk Analysts (SIRA) that helped test and provided feedback on the OpenPERT add-in. Find out more about SIRA here.

Ref. 1 – Malcolm, D. G., J. H. Roseboom, C. E. Clark, W. Fazar Application of a Technique for Research and Development Program Evaluation OPERATIONS RESEARCH Vol. 7, No. 5, September-October 1959, pp. 646-669

Deconstructing Some HITECH Hype

February 23, 2011

A few days ago I began analyzing some model output and noticed that the amount of loss exposure for ISO 27002 section “Communications and Operations Management” had increased by 600% in a five week time frame. It only took a few seconds to zero-in on an issue that was responsible for the increase.

The issue was related to a gap with a 3rd party of which there was some Health Information Technology for Economic and Clinical Health Act (HITECH) fine exposure. The estimated HITECH fines were really LARGE. Large in the sense that the estimates:

a.    Did not pass the sniff test
b.    Could not be justified based off any documented fines / or statutes.
c.    From a simulation perspective were completely skewing the average simulated expected loss value for the scenario itself.

I reached out to better understand the rationale of the practitioner who performed the analysis and after some discussion we were in agreement that some additional analysis was warranted to accurately represent assumptions as well as refine loss magnitude estimates – especially for potential HITECH fines. About 10 minutes of additional information gathering yielded valuable information.

In a nutshell, the HITECH penalty structure is a tiered system that takes into consideration the nature of the data breach, the fine per violation and maximum amounts of fines for a given year. See below (the tier summary is from link # 2 at the bottom of this post; supported by links # 1 and 3):

Tier A is for violations in which the offender didn’t realize he or she violated the Act and would have handled the matter differently if he or she had. This results in a $100 fine for each violation, and the total imposed for such violations cannot exceed $25,000 for the calendar year.

Tier B is for violations due to reasonable cause, but not “willful neglect.” The result is a $1,000 fine for each violation, and the fines cannot exceed $100,000 for the calendar year.

Tier C is for violations due to willful neglect that the organization ultimately corrected. The result is a $10,000 fine for each violation, and the fines cannot exceed $250,000 for the calendar year.

Tier D is for violations of willful neglect that the organization did not correct. The result is a $50,000 fine for each violation, and the fines cannot exceed $1,500,000 for the calendar year.

Given this information and the nature of the control gap – one can quickly determine the penalty tier as well as estimate fine amounts. The opportunity cost to gather this additional information was minimal and the benefits of the additional analysis will result  in not only more accurate and defendable analysis – but also spare the risk practitioner from what would have been certain scrutiny from other IT risk leaders and possibly business partner allegations of IT Risk Management once again “crying wolf”.

Key Take-Away(s)

1.    Perform sniff tests on your analysis; have others review your analysis.
2.    There is probably more information then you realize about the problem space you are dealing with.
3.    Be able to defend assumptions and estimates that you make.
4.    Become the “expert” about the problem space not the repeater of information that may not be valid to begin with.

Links / References associated with this post:

1.    HIPAA Enforcement Rule ref. HITECH <- lots of legalese
2.    HITECH Summary <- less legalese
3.    HITECH Act scroll down to section 13410 for fine information <-lots of legalese
4.    Actual instance of a HITECH-related fine
5.    Interesting Record Loss Threshold Observation; Is 500 records the magic number?

Simple Risk Model (Part 3 of 5): Simulate Loss Magnitude

December 22, 2010

Part 1 – Simulate Loss Frequency Method 1
Part 2 – Simulate Loss Frequency Method 2

In parts one and two of this series we looked at two methods for simulating loss frequency. Method one – while useful – has shortcomings as it primarily requires working with expected loss frequency values less then 1 (once per year). In addition, with method one, it was not possible to determine iterations where loss frequency could be greater then once per year.

Method two overcame these limitations. We leveraged the Poisson probability distribution (discrete distribution) as well as an expected loss frequency value and a random value between 0 and 1 to return a loss value (an integer) for any given iteration. Using this method – about 10% of our iterations resulted in loss events and some of those iterations had multiple loss events. From my perspective method two is the more useful of the two – especially since it has the potential to account for low probability situations where there could be numerous loss events for any simulation iteration.

The purpose of this post is to simulate loss magnitude. Conceptually, we are going to do what we did with loss frequency method two – but our distribution and input parameters will differ. To simulate loss magnitude we need four things:

1.    A continuous probability distribution.
2.    A random value between 0 and 1
3.    An expected or average loss magnitude
4.    A loss magnitude standard deviation

Continuous Probability Distribution. Technically, if you have internal or external loss magnitude data, you would analyze that data and fit the data to an appropriate continuous probability distribution. There are dozens of such distributions. There are often times where we have limited data or we need to make good faith (or “educated”) assumptions about the shape of our loss magnitude curve. A lot of IT risk scenarios loss magnitude curves are often assumed to be normal or lognormal in nature. Normal is often assumed but it has its limitations since there can be negative values and rarely is there a “perfect” normal loss magnitude curve for IT risk scenarios. However, most of the “normal-like” distributions converge to normal (as data points increase). Thus, for the purposes of demonstration I am going to use the normal distribution.

Random Value Between 0 and 1. Because we are dealing with uncertainty and a distribution, we will use random values between 0 and 1 in our probability distribution; think Excel function RAND().

Expected or Average Loss Magnitude. Statistics 101 – If you take the sum of X values and divide by X you get the average. Quantitative risk analysis methodologies like FAIR can facilitate deriving an average loss magnitude estimate. Or maybe, you have actual loss magnitude data points. How you derive average loss magnitude is not the focus of this post – just remember that to use the normal distribution you need that average loss magnitude value.

Loss Magnitude Standard Deviation. More Statistics 101. At a high level, standard deviation is a statistic or measure of how spread out our data points are relative to the mean. The larger the number, the greater or flatter our distribution (think bell curve) will be; the smaller the number – the more narrow the bell curve will be. In the interest of brevity, it is assumed that either you can use existing Excel functions to calculate a standard deviation from your loss magnitude data points, or your risk analysis tool sets will provide this value to you. In some cases you may not have actual data sets to calculate a standard deviation let alone an average magnitude value – in those cases we have to make our best estimates and document assumptions accordingly.

How do these work together? In layman’s terms – given a normal loss distribution with an average loss magnitude of $5000 and a standard deviation of $1000; what is the loss value (inverse cumulative value) at any point in the distribution, given a random probability value?

You may want to download this Excel spreadsheet to reference for the rest of the post (it should work in Excel 2003, Excel 2007 and Excel 2010; I have not tested it on Office for Mac). Reference tab “magnitude” and make sure you view it in Excel and NOT in Google Apps.

a.    The average loss magnitude amount is $5000 (cell B1; tab “magnitude”)

b.    The loss magnitude standard deviation is $1000 (cell B2; tab “magnitude”)

c.    For purposes of demonstration, we will number some cells to reflect the number of iterations (A9:A1008; A9=1; A10=A9+1; drag A10 down to you get to 1000).

d.    In Excel, we would use the =RAND() function to generate the random values in cells B9:B1008.

e.    Now, in column C beginning in cell C9 – we are going to combine a Normal probability distribution with our average loss ($B$1), standard deviation ($B$2) and the random value(s) in column B to return a loss value. In other words, given a normal distribution with mean $5000 and standard deviation of $1000 – what is the value of that distribution given a random value between 0 and 1 – rounded to the nearest 10th? You would type the following in C9 and then drag C9 down to C1008:

Let’s dissect this formula.

i.    ROUND. I am going to round the output of this formula to the nearest 10; annotated by the -1.
ii.    MAX. Because we are using the normal distribution and because some values could be less then zero which is not applicable for most IT scenarios, we are going to compare the value generated by the NORMINV function to 0. Which ever is larger is the value that then gets rounded to nearest 10.
iii.    NORMINV. This is the function built into Excel that returns an inverse cumulative value of a normal distribution given a probability, a mean and a standard deviation.

f.    Once you have values in all the cells – hit F9 a few times.

g.    Cell B3 gives the minimum loss value from cells C9 through C1008. The random value associated with the minimum value is probably less then 0.00xxxx.

h.    Cell B4 gives the maximum loss value from cells C9 through C1008. The random value associated with the maximum value is probably greater then 0.99xxxx.

i.    The histogram shows the count of iterations whose loss magnitude values falls within a loss magnitude bin. If you drew a line around the tops of each column it would resemble a bell curve. We expect to get this since we are using the normal distribution.

j.    Press the F9 key; new random values will be generated. Every time you press F9 think of it as a new simulation with 1000 iterations. Press F9 lots of times and you will notice that the histogram changes as well. While individual bin counts will change – the general shape of the histogram does not.

k.    By the way, if you change the average loss magnitude value in cell B1 – the histogram will probably break. But you can change the value in B2 to 500, hit F9 a few times and observer how the bell-curve shape becomes more narrow. Or, change B2 to 2000 and you will see a much flatter bell curve.


1.    As we did with simulating loss frequency, we leverage randomness to simulate loss magnitude.

2.    While we typically talk about an average loss magnitude value; losses can range in terms of magnitude. Being able to work within a range of loss values gives us a more complete view of our loss potential.

In part four of the series, we will combine loss frequency and loss magnitude into one simulation. For every iteration, we will randomly derive a loss frequency value (an integer) and a loss magnitude value. We will then calculate an expected loss, which is the product of the loss frequency and the loss magnitude values. Perform this cycle thousands or millions of time and you now have an expected loss distribution.

Simple Risk Model (Part 1 of 5): Simulate Loss Frequency #1

October 25, 2010

Let’s start this series by defining risk. I am going to use the FAIR definition of risk which is: the probable frequency and probable magnitude of future loss. From a modeling perspective, I need at least two variables to model the risk for any given risk issue: a loss frequency variable and a loss magnitude variable. Hopefully, you are using a risk analysis methodology that deconstructs risk into these two variables…

The examples I am sharing in this blog series are an example of stochastic modeling. The use of random values as an input to a probability distribution ensures there is variation in the output; thus making it stochastic. The variable output allows for analysis through many different lenses; especially when there are additional (meaningful) attributes associated with any given risk issue (policy section, business unit, risk type, etc…).

Part 1 and 2 of this series will focus on “probable or expected [loss] frequency”. Frequency implies a number of occurrences over a given period of time. Loss events are discrete in nature; there are no “partial” loss events. So, when we see probable loss frequency values like 0.10 or 0.25 – and our time period is a year – we interpret that to mean that there is a 10% or 25% chance of a loss event in any given year. Another way of thinking about it is in terms of time; we expect a loss event once every ten years (0.10) or once every four years (0.25). Make sense?

You may want to download this Excel spreadsheet to reference for the rest of the post (it should work in Excel 2003, Excel 2007 and Excel 2010; I have not tested it on Office for Mac).

Make sure you view it in Excel and NOT Google Apps.

In a simulation, how would we randomly draw loss frequency values for a risk issue whose expected loss frequency is 0.10, or once every ten years? I will share two ways; the first of which is the remainder of this post.

For any simulation iteration, we would generate a random value between 0 and 1; and compare the result to the expected loss value

a.    The stated expected loss frequency is 0.10 (cell B1; tab “loss 1”)

b.    For purposes of demonstration, we will number some cells to reflect the number of iterations (A6:A1005; A6=1; A7=A6+1; drag A7 down to you get to 1000).

c.    In Excel, we would use the =RAND() function to generate the random values in cells B6:B1005.

d.    We would then compare the randomly generated value to the expected loss frequency value in cell B1; with this code in C6 dragged down to C1005:


i.    If the generated random value in cell B6 is equal to or less then 0.1000 (cell B1), then the number of loss events for that iteration is 1.
ii.    If the generated random value in B6 is greater then 0.1000, then the number of loss events for that iteration is 0

e.    Once you have values in all the cells, you can now look at how many iterations resulted in a loss and how many did not. Cell B2 counts the number of iterations you had a loss and cell B3 counts the number of iterations you did not have a simulated loss; their corresponding percentages are next to each other.

f.    The pie chart shows the percentage and count for each loss versus no loss.

g.    Press the F9 key; new random values will be generated. Every time you press F9 think of it as a new simulation with 1000 iterations. Press F9 lots of times and you will notice that in some simulations loss events occur greater then 10% of the time and in some simulations less then 10% of the time.

h.    What you are observing is the effect of randomness. Over a large number of iterations and/or simulations we would expect the loss frequency to converge to 10%.

i.    Another thing worth mentioning, is that output from the RAND() function is uniform in nature. Thus, there is equal probability of all values between 0 and 1 being drawn for any given iteration.

j.    Since our expected loss frequency is 0.1000 and the RAND() functions output is uniform in nature – we would expect to see 10% of our iterations result in loss; some were more and some were less.

There are some limitations with this method for simulating the loss frequency portion of our risk model:

1.    If the expected loss frequency is greater then 1 then using RAND() is not viable, because RAND() only generates values between 0 and 1.

2.    In iterations where you had a loss event; this method does not reflect the actual number of loss events for that iteration. In reality, there could be some iterations (or years) where you have more then one loss event.

Some of the first models I built used this approach for generating loss frequency values. There is usefulness regardless of its simplicity. However, there are other methods to simulate loss frequency that are more appropriate for modeling and overcome the limitations listed above. In the next post, we will use random values, a discreet probability distribution and the expected loss frequency value to randomly generate loss frequency values.

NOTES / DISCLAIMERS: I am intentionally over-simplifying these modeling examples for a few reasons:
1.    To demonstrate that IT Risk modeling is achievable; even to someone that is not an actuarial or modeling professional.
2.    To give a glimpse of the larger forest past some of the trees blocking our view within the information risk management profession.
3.    As with any model – simple or complex – there is diligence involved to ensure that the right probability distributions and calculations are being used; reflective of the data being modeled.
4.    In cases where assumptions are being made in a model; they would be documented.


August 28, 2010

Image Source;

I get a lot of satisfaction from teaching others the FAIR methodology. But equally satisfying is me knowing that I am helping build a culture of analytical thinking for both the class participant and our employer.

This past week I had the privilege of teaching a three-day BASIC FAIR course at my employer. This is the second FAIR course I have taught and I can honestly state that I learned a lot about my company and the course participants; most of which I will be interacting with in the coming months in a consulting capacity.

Teaching the FAIR methodology is very challenging and rewarding. Because people’s preconceived notions of risk are challenged within minutes of being introduced to FAIR – there is no shortage of AH-HAH moments for them as well as no shortage of the instructor being stretched to unimaginable limits to take their examples and questions and view them through the lens of FAIR. I have walked away from both classes feeling like I learned more then they did.

I am currently reading “The Flaw of Averages” by Sam L. Savage. I highly recommend this book for a seasoned information risk practitioner. I will probably reference the book may times in future posts but for this post I want to talk about a sentence or two from Chapter 11; page 85 (hardcover). Savage references Well Fargo in 1997 and how they ‘maintained a culture of analytical thinking’.

So ask yourself this: Does my information risk management program instill a culture of analytical thinking or one of F.U.D. (Fear, Uncertainty & Doubt)?

The FAIR methodology when used correctly will force the practitioner to be analytical. But for an entire information risk management program to require all of its members to go through this training is telling of the culture we are creating. And guess what? This analytical thinking is not limited to our information risk management program. Our practitioners have to be able to explain their risk analysis to those individuals (IT & Business) accountable for the risk and responsible for the mitigation activity.

In summary, I get a lot of satisfaction from teaching others the FAIR methodology. But equally satisfying is me knowing that I am helping build a culture of analytical thinking for both the class participant and our employer.