Intelligence and Security Informatics: An Information Economics Perspective

1. Intelligence and Security Informatics:An Information Economics Perspective Lihui Lin, Xianjun Geng, Andrew B. Whinston School of Management, Boston University Center for Research in Electronic Commerce, University of Texas June 3, Tucson

2. Agenda • Challenges to Intelligence and Security Informatics • Analyzing the incentives and credibility of information: Insights from information economics • Signaling and its applications in ISI • Signal-jamming and its applications in ISI • Complexities unique to ISI • Providing actionable intelligence: insights from new developments in knowledge management

3. Challenges to Intelligence and Security Informatics • The challenge lies not only in the sheer information overload, but also in the convolutions in the information. • Three functions that an intelligence and security information system should have: • Process vast volume of information; • Process and analyze information from diverse sources with distinctive incentives and credibility; • Provide actionable intelligence, i.e. suggest preemptive actions based on the analysis of information.

4. Challenges to Intelligence and Security Informatics • The need to study the incentives and credibility of diverse information sources is unique to intelligence and security informatics (ISI). • Natural sciences: incentives usually not an issue; • Knowledge Management: knowledge sharing between parties with perfectly or largely aligned interests (e.g. within an organization); • Economics, Finance, Accounting theories concerning asymmetric information: parties with partially aligned interests; • ISI: diverse information sources with distinctive incentives

5. Information Economics: Overview • Information economics, which studies incentives and market equilibrium in situations with asymmetric information, has been a prolific part of economic theory for more than two decades. • Akerlof (1970): The market for lemons • Spence (1973): Signaling in labor markets • Rothschild and Stiglitz (1976): Screening in insurance markets. • Green and Stokey (1980), Crawford and Sobel (1982): generalized sender-receiver model

6. Signaling Games and Implications to ISI • Labor market (Spence 1973) • Workers have private information about their true ability. • They all have the incentive to overstate their ability. • Education level serves as a “signal” to the employer about the true ability of the worker. • Either separating or pooling equilibrium may occur. • Story of gazelles (Bergstrom 2002): • Grazing on the savannah, a gazelle spots a feline form moving through the tall grass fifty meters away. It lifts its head, listening, sniffing the breeze, and then suddenly, released like a jack-in-the-box, it springs straight up into the air, six feet high. It lands, only to repeatedly leap in place again and again. Other members of the herd notice, and quickly begin to imitate its display.

7. Signal Games and Implications to ISI • Deception: • In communications, there are honest and dishonest senders of information and only they know who they are. • The dishonest type tries to imitate the behaviors of the honest type to convince the information receiver that they are telling the truth. • Two possible results: • Separating: there is no way that the dishonest can imitate the behaviors of the honest. • Pooling: the behaviors of the honest can be perfectly imitated by the dishonest and the receiver cannot distinguish them. • How to achieve the separating result? • Design a signaling mechanism.

8. Signal-jamming Games and Implications to ISI • Signal-jamming models in finance: • No one knows the true ability of a manager, including the manager himself. • The manager makes efforts to improve the performance of the company. • Career concern model • Inefficient managerial behavior model • Whatever the effort is, the stockholders are not fooled and will correctly figure out the true ability or the true performance of the company. • The “efforts” made by the manager are jammed signals.

9. Signal-jamming Games and Implications to ISI • Signal-jamming example in ISI context: • No sender knows exactly how valuable his/her information is. Nonetheless, everyone tries to emphasize the importance of his/her information, using various signals/cues. • The receiver discounts the importance of all information. • Result: Signals are jammed and no information is communicated effectively.

10. Information economics models: One particular model, signal or signal jamming, is used to deal with one problem. Senders of information may have different characteristics, but are homogeneous in their incentives and information structure. Intelligence and Security Informatics: Must determine the correct model to use: signaling or signal-jamming; signals or noise. Senders of information not only differ in characteristics, but are also heterogeneous in their incentives and information structure, which means one type of model cannot fully describe the problem. ISI: Unprecedented Complexities

11. ISI: Unprecedented Complexities Effective communication Standard Signaling ? Has private information ? Sender’s information structure Standard Signal-jamming ? No private information Fully aligned with receiver Between fully aligned and fully opposing Completely conflicting Sender’s interests

12. Task of ISI • As a cornerstone in intelligence and security informatics, a theory should be developed, which incorporates the heterogeneity of the senders and provides solutions that allow the receiver to discern between senders of different nature as well as the information itself.

13. Challenges to Intelligence and Security Informatics • Three functions that an intelligence and security information system should have: • Process vast volume of information; • Process and analyze information from diverse sources with distinctive incentives and credibility; • Provide actionable intelligence, i.e. suggest preemptive actions based on available information. • ISI must be able to suggest preemptive actions purely based on the analysis of information.

14. Knowledge Value (unobservable) Knowledge Usefulness Knowledge Adoption Signals Knowledge Quality (unobservable) Distorted Message Noise Knowledge Knowledge Usefulness Adoption Distortion (by the sender) Related Theories Geng, Lin and Whinston (2003): a sender-receiver framework for knowledge transfer

15. Concluding Remarks • Intelligence and Security Informatics confronts unique issues and an information economics perspective is useful in addressing these issues. • Problems in ISI are more complex than any problem that information economics has ever studied.

16. Questions?