A methodology for managing risk in electronic transactions over the Internet

Authors:
Rajan M. Lukose;Bernardo A. Huberman
Affiliations:
Internet Ecologies Group, Xerox Palo Alto Research Center, Palo Alto, CA 94304, USA;Internet Ecologies Group, Xerox Palo Alto Research Center, Palo Alto, CA 94304, USA
Venue:
Netnomics
Year:
2000

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Abstract

The explosive growth of the Internet has made possible an economic transformation in which commerce will become largely electronic. In this vision, the medium of communication and negotiation becomes a distributed network of computers equipped with robust, secure and trusted “cash” mechanisms. It is thus of paramount importance to design mechanisms that will ensure timely and reliable transactions in cyberspace. In this paper we present a methodology for quantitatively managing the risk and cost of executing transactions in a distributed network environment by exploiting an analogy with modern financial portfolio theory. We illustrate the methodology with several concrete examples under different pricing schemes, as well as with empirical measurements of Internet traffic.