Optimal Timing of Information Security Investment: A Real Options Approach

Abstract

This chapter applies real options analytic framework to firms' investment activity in information security technology and then a dynamic analysis of information security investment is explored by extending Gordon-Loeb (2002). The current research provides how firms have to respond to immediate or remote threat numerically. It shows that although positive drift of threat causes both larger and later investment expenditure, negative drift causes immediate investment and lower investment expenditure. The efficiency of vulnerability reduction technology encourages firms to invest earlier and induces cost reduction. To know the form of vulnerability is important because the effect of high vulnerability on timing and amount of the investment expenditure is mixed.