Edit 08/12/21 at 2.15 BST: Just putting in a link to the report which was the result of the research project underlying this post, so that people can more easily find it.
Edit 07/07/20 at 1.30 pm BST: Thank you for your comments so far! In particular, there were a few useful comments on some of the 'conservative' estimates being too optimistic. As a result, I've updated some of those and replaced the sheet model by this Guesstimate model.
This model more accurately represents the uncertainty I have about these estimates and doesn't require the use of vague terms such as "conservative". Furthermore, it includes the "parameter uncertainty" factor, which is found by comparing the estimated yearly impact multiplier with the 10-yearly one: it seems to be an important factor that shouldn't be left out of the analysis.
For clarity, I'd also like to further emphasize that the primary purpose of this post is not to make a case for my current estimates, but to invite input on (1) the overall model, (2) missing factors and (3) which factors to prioritize for research. Indeed, my current estimates should be taken with a huge grain of salt, as I have hardly spent any time on most of them so far: refining these estimates is the purpose of the remainder of this research project. However, as mentioned above, comments on where you think my current estimates are wrong are obviously welcome as well!
After having to pause the project for a while, we have recently resumed work on the idea of a long-term investment fund at Founders Pledge. The next step is a research project on the impact of ‘investing to give later’ as a philanthropic strategy more generally. This will help us decide whether to launch the fund and to what extent to prioritise it.
In this post, I outline the key factors that bear on this question as I currently see them, after preliminary research, and draw a tentative conclusion. Please note that these represent my personal views, and not currently those of Founders Pledge.
I would appreciate any thoughts on (1) important factors that are missing, (2) faults in my reasoning and methodology, (3) which factors to prioritize deepening out further, and (4) resources or connections that would be helpful in doing that. Please leave these in the comments on this post or reach out at email@example.com.
Before launching into the content, I’d like to particularly thank Phil Trammell for the substantial contribution of his work on patient philanthropy (see also this 80,000 Hours podcast) to this project so far and for discussion and comments. I’m also grateful to Michael Dickens, Sasha Cooper, and my colleagues Aidan Goth and John Halstead for comments on a draft of this post. Finally, as will be clear from the linked sources below, this work leans heavily on earlier work by other people in the effective altruism community.
Edit 03/07/20 at 7 pm BST: It happens Michael Dickens was working on a very similar topic in parallel, and just published his work as well. We both wrote our post before seeing each other's, so any overlap in content is coincidental.
I go into 7 key factors that determine how investing to give later compares to giving now for an individual investor-philanthropist in the current situation. Together, these paint a relatively strong picture in favour of investment: it seems plausible that one can have positive real, net financial returns and a growing share of the economy in expectation - taking into account value drift and expropriation risks - and that there are significant benefits to investment in terms of learning. Parameter uncertainty likely further strengthens the case for investment.
Risks of asset loss, risks of value drift, and uncertainty about the availability of high-impact giving opportunities over time weakens our confidence in this conclusion, but not to the extent that it changes it. There are however some ways of ‘investment-like’ giving, such as encouraging others to invest, which might compete with direct financial investment.
Excluding those ‘investment-like’ giving opportunities, my current best guess estimate is that an investor-philanthropist will on average be able to multiply the total impact of their funds by ~1.01 in one year and by >>10 in ten years. This is if they intend to spend the funds on longtermist objectives; I intend to add estimates from a short-termist perspective at a later point.
Defining ‘investing to give later’
Here we consider ‘investing to give later’ to be a philanthropic strategy in which one engages in for-profit investing with the intention to donate the principal and expected profits at a later time point.
In particular, we’ll consider the case from the point of view of an altruistic and strategic individual investor-philanthropist with limited resources (<$100 million) and in the immediate situation, i.e. whether this individual should invest the coming few years rather than spend this year, assuming he/she cannot coordinate with others. This is distinct from the question of what is the optimal spending rate in the effective altruism community as a whole, which Phil Trammell explores in his paper, or the question of at which point in time and to what extent an investor-philanthropist should change strategy. If we conclude here that investment is the optimal choice right now this doesn’t imply (1) that this will hold if a lot of value-aligned others also start doing it or (2) that this will hold at a later time point.
Financial returns on investment
Arguably the largest advantage of investing is that it can exponentially grow financial resources, which can be used for good at a later point. The S&P 500 has had an inflation-adjusted annualized return of ~7% since its inception in 1926. We need to adjust this for selection bias, as there have been multiple markets in other countries that have done a lot worse, or have even ceased to exist (e.g. the Rio de Janeiro Stock Exchange). A recent Credit Suisse report attempts this for global equity returns and finds an annualized real return of ~5% from 1900 to 2019.
There is controversy about whether inflation-adjusted prices using the Consumer Price Index are accurate: it’s likely the CPI is biased upwards, and hence that average recent global returns have been (much) higher than 5%.
For the purpose of this discussion, we’ll stick with 5% as a conservative estimate for real expected returns on index fund investing. This, in turn, is a lower-bound on expected real returns from investing more generally: higher returns seem possible with other types of investments, e.g. leveraged or venture capital investment, if one is able to exploit risk, information and/or market access premiums. We hence conservatively assume that a skilled investor can achieve 7% expected real returns. Note that this will come at the expense of higher risk, but that this is much less important for altruistically-minded investors, though it needs to be taken into account to some extent.
In addition to imperfect information and access, the existence of this opportunity can largely be explained by the pure time preference of most market actors and their risk aversion. An altruistic and strategic philanthropist is much less risk-averse (the extent to which may depend on the cause area) and doesn’t have a (strong) pure time preference: even if he/she cares more about the current generation, this is likely for person-affecting reasons, and those consider personhood rather than time.
Risks of loss or value drift
The gained financial value will not be fully converted into philanthropic value if it is lost before it can be spent (for other reasons than investment losses) or if it’s spent on less valuable activities. This could happen in a variety of ways, e.g. via legal challenges, theft, government taxation, existential catastrophes, or value drift of an investment vehicle’s management.
Existential risk estimates can be used as a lower bound for the loss rate. This is especially true from a longtermist perspective, as almost by definition your money will be worth a lot less after an existential catastrophe has happened. It also seems reasonable from a short-termist/person-affecting perspective, as many plausible existential risks will directly lead to a loss of assets. Toby Ord’s best guess estimate in the Precipice is a risk of one out of six in the coming century, which converts into a yearly rate of ~0.2%. From Ord’s argumentation it seems like he thinks the risk is increasing (most of the risk comes from future technologies), so we should perhaps revise this lower bound to 0.1% for investment in the current moment. On the other hand, many global catastrophic risks could be sufficient for asset loss, which our best guess estimate should take into account.
As an upper bound for the loss rate, we can look at the reference class of exiting nonprofits: a strategic investor-philanthropist should easily be able to outlive the average nonprofit, which has to deal with a lot more pressures (including fundraising) and for which asset loss is only one of the potential reasons to cease to exist. In the US, the yearly exit rate of nonprofits is ~4% (between 3% and 5%).
There are reasons to estimate the relevant loss rate much closer to the lower than the upper bound. Taking an inside view perspective, the short-term risk of loss is arguably low: beyond global catastrophic risks and war it’s hard to imagine many scenarios (other than investment risks) in which an investor-philanthropist would lose their assets in the current environment of (seemingly) stable property rights. Furthermore, for a proportion of the scenarios one could imagine there would be warning signs (e.g. of an impending war), which would allow the investor-philanthropist to change their strategy in time. Note also that scenarios in which the investor-philanthropist is forced to spend their money should not be counted as loss risks.
The risk of value drift is even harder to estimate, but an important factor. For instance, these three sources (1,2,3) collectively suggest a yearly value drift rate of ~10% for individuals within the effective altruism community.
However, the short-term value drift rate also seems much easier to influence positively, most easily via a proper design of a legal vehicle used by the investor-philanthropist. One can, for instance, commit one’s funds to be given to charitable entities by investing from a donor-advised fund, and appoint a committee of trustees to spread the risk of value drift.
Given the availability of these strategies, my best-guess estimate for the short-term value drift rate is currently 2% for a strongly committed and strategic investor-philanthropist. However, I have a lot of uncertainty about this and this estimate depends a lot on the the hypothetical investor-philanthropist in question, so I invite the reader to make their own estimates based on the case they are considering.
Availability of opportunities
Independent of whether we are able to detect them, the value of the best available funding opportunities changes over time and is dependent on the amount of capital one has.
First, at any point in time, marginal social returns to philanthropic capital are plausibly diminishing with respect to the amount of capital one spends. There might be exceptions to this, however: certain projects might have increasing marginal returns and some might even require a minimum amount of capital to have any chance of success at all. Creating a new global institution could be an example.
More importantly, when one is trying to improve the world rather than one's own life, one should consider one’s spent philanthropic capital as a marginal contribution to all of the capital that is spent in a value-aligned way. This means that diminishing returns will probably only play a significant role at very large amounts of spent personal philanthropic capital (>$100m). Hints of this can be observed empirically by looking at the scale of room for funding of GiveWell’s recommendations, or considering that Open Philanthropy is now able to spend more than $200m on a yearly basis on funding opportunities that meet their bar.
We should distinguish the above diminishing marginal returns to personal philanthropic spending from the diminishing marginal returns that could result from increased concurrent spending by other aligned philanthropists, or by actors that have at least similar instrumental goals. Here, too, there could be exceptions due to some major philanthropic projects only being feasible with a minimum amount of total capital dedicated to them. Furthermore, total aligned spending is not guaranteed to increase over time. In the case of the effective altruism community, an increase seems likely for at least the foreseeable future, especially given the plans of Open Philanthropy/Good Ventures to increase spending over time and the recent arrival of Ben Delo as another UHNW effective altruist donor. This is less clear for a more general category of instrumentally aligned spending.
A changing world
Secondly and probably most importantly, there might be more or less impactful opportunities available due to a world that is exogenously in flux.
From a longtermist perspective, this consideration is strongly related to the debate on ‘hingeyness’, though here we exclude the exogenous learning factor discussed below. One intuition says that the earlier in time, the more of the future you still have to influence, so the better the opportunities that will be available to you. On the other hand, this might be a very small effect, given the potential length of time still left to us. Moreover, it seems most likely to be dominated by other (more local) factors, such as whether humanity has just developed the power to destroy itself, or is going through a period of exceptional economic growth. I won’t address the full debate here in detail: it seems to be far from a done discussion, and it currently seems wise to explore interventions that are optimal across the spectrum of views. More importantly, most arguments about this being a special time (e.g. those from existential risk) concern the whole century or the next few centuries we are living in rather than the specific year, so it seems reasonable to assume the next few years will be quite similar to this year (in expectation) in terms of their hingeyness.
From a short-termist/person-affecting and human-centric perspective, a relevant question is how fast diseases and poverty might be eradicated exogenously, as this might influence how much good you can do. A rough but useful proxy for how fast this is happening is the number of people living in extreme poverty. This was 730 million in 2015 and was projected by the World Bank to reduce to 480 million by 2030, which implies a yearly rate of reduction of 2.7%. Another data point is the global growth rate of ~2%. Both are, however, no direct proxies for the availability of cost-effective opportunities to help people. A more direct but also more noisy way of looking at this question is by considering GiveWell’s cost-effectiveness estimates over time. In 2012, they estimated the cheapest way to save a life to be $2300 for bednets, and in 2019 this was still $2300 (also for bednets). Looking at their cost-per-life-saved-equivalent numbers, Michael Dickens has even estimated a strong decrease from $2066 to $443 in the same time period, though this is arguably more strongly influenced by learning than by new or better giving opportunities being available. Taken together, my best guess is that there currently is a relatively slowly increasing cost to helping people, if at all.
Another important advantage of investing over giving now is that it will allow an investor-philanthropist to learn about better giving opportunities over time. Here we are talking about the ability of the investor-philanthropist to identify the best opportunities that are available, rather than whether those opportunities are available (see above).
We should distinguish between two forms of learning: endogenous and exogenous. Endogenous learning is the learning that the investor-philanthropist brings about themselves, e.g. by funding research or trying things out. Opportunities for endogenous learning can be a reason to give now rather than to invest (see the section on compounding returns on giving below).
Exogenous learning includes advances in the scientific community, new philanthropic interventions being invented and/or tried out, moral progress, and more. It also captures the time needed for relevant knowledge to become available, e.g. an experiment might take time, research might need to be done in a certain order, or there might be a talent constraint in a research area that takes time to be resolved. When learning is done exogenously, there are advantages to waiting and hence investing.
90% of all scientists who ever lived are alive today, and we should expect big gains in knowledge across the board, though maybe not as much as that number would suggest on first sight. More importantly though, effective altruism is still a very young endeavour, so an investor-philanthropist should expect there to be a high rate of exogenous learning in the effective altruism community in the short to medium term.
From a short-termist/person-affecting perspective, as an illustration, consider that GiveWell has only been around for 13 years, Animal Charity Evaluators only for 8 years and Founders Pledge research only for 3 years, with new high-impact giving opportunities being discovered by these organisations on a regular basis. On the other hand, looking back at the example above, GiveWell has had broadly similar top giving recommendations since 2012, though they have only recently started considering policy interventions.
From a longtermist perspective, exogenous learning is an (even) more important factor. Firstly, longtermism as a more formal idea has only very recently been developed, though institutional work has been done on it at least since the founding of the Future of Humanity Institute in Oxford in 2005. Secondly, the number of people working full time on what is the best thing to do from a longtermist perspective is probably less than 200. Thirdly, funding opportunity research specifically is even younger than for short-termism, with the first institutional research probably being carried out by Open Philanthropy around 2014, and existential risk currently being the only well-established intervention area.
In addition to uncertainty about the best funding opportunities to achieve some defined goal, there is a lot of uncertainty and debate even about what the goals should be: should we be short-termist/person-affecting or longtermist; to what extent should we include animals in our moral concern; should we ultimately mostly/only aim for some (broad) measure of subjective well-being or are there other things that are important to consider as well? Given how recent it has been for many of these ideas to gain serious traction (e.g. Peter Singer’s Animal Liberation was only published in 1975, though the idea had obviously been around for a lot longer), it’s likely we have a lot to learn still and could hope to learn more relatively soon.
Lastly, we might learn more about investing to give later as a philanthropic strategy itself. To my knowledge, Phil Trammell’s paper is the first formal document to outline the case for this, and in this research project I will likely only be able to scratch the surface. From the factors presented here, the difference in impact potential between investing and giving now could plausibly be very large, certainly over longer time scales. And there is a relevant asymmetry: unless one has good reason to believe there is an extraordinary and timely giving opportunity available right now, it seems the expected cost of investing and waiting on more information (for a limited time) if giving now turns out to be better is lower than the expected cost of giving now and foregoing the opportunity to ever invest if investing turns out to be better.
There is a lot of uncertainty about many if not all of the parameters discussed above, e.g. the expected financial returns, the expropriation and value drift rates, and the learning rate. If these parameters combined are likely to cause compounding positive effects, then this uncertainty itself can further increase the expected value of investing over time.
In mathematical terms: for any yearly rate of social return r > 0, and any constant q > 0, the world in which r = q delivers a smaller multi-year social return than the world in which r is distributed as a non-degenerate random variable R > 0 where E[R] = q.
My model suggests this to be an important factor: there is a large difference between the one-year and ten-year impact multiplier for investing to give later.
Compounding returns on giving now
A final factor to consider in favour of giving now is whether there might be giving opportunities that themselves have larger compound (social) returns than investing does.
From a short-termist/person-affecting and human-focused perspective, an argument that is often brought up is that direct global health and poverty interventions may have compound gains for beneficiaries that outweigh compound investment gains. Phil Trammell explains in his paper (section 5.1.2 and 5.1.3) why this is almost certainly not the case, at least over longer timescales, for both theoretical and empirical reasons. The main conceptual point is that even though someone in poverty might obtain gains above the world growth rate (~2%) for a few years, these gains are (1) likely to disperse rapidly and (2) partially used for consumption without compounding returns. If the beneficiary of a donation is not themselves reprioritizing the spending of their gained resources (health, money, knowledge, etc.) on the best available giving opportunities in the world (or investing those resources), then the yearly gains of those resources will at some point be bounded from above by the growth rate.
If one is only concerned with effects in the very short term (e.g. 10 years) though, it could be that the short-term higher returns are a reason to give now rather than invest. However, without such short limits on the time horizon of effects, this by itself doesn’t affect the comparison: investing even only for 1 year and then giving would be better than giving now, as the extra early gains from investing would outstrip the bounded future gains from giving now.
There are, however, some giving opportunities which are ‘investment-like’ and could in principle have higher compounding returns than investment, even in the longer term, and both from a short-termist/person-affecting and longtermist perspective.
One obvious candidate is encouraging other people with aligned values to invest: at a high enough success rate per dollar spent on this, it is clear that this would beat direct investment, and the main uncertainty is whether such a success rate can be achieved. More general effective altruism movement-building may also qualify, but this is only true with certainty if it leads to a high enough rate of people joining and a large enough rate of those people choosing to invest.
Secondly, there is capacity building, including endogenous learning: if certain activities (e.g. research) increase the impact one can have from that moment onwards until one's last dollar is spent, those activities have compound gains that when large enough could exceed those of investment. The case for those activities becomes even stronger if they also affect the ability of others to have a positive impact. However, we should take into account the counterfactual: if this capacity building will happen anyway (i.e. can be achieved exogenously), and will be funded by someone who wouldn’t otherwise have invested, this would likely balance the scales in favour of investing.
Synthesis of factors
In this Guesstimate model, I have made preliminary estimates for the importance of each of the factors from a longtermist perspective. I have combined these to come to a very tentative estimate of the expected impact multiplier for investment relative to giving now, both over 1 year and over 10 years.
This approach has important limitations, and this is only a first iteration, but I think it’s important to have an explicit model to (1) bring the discussion out of a vaguer “there are arguments on both sides” realm and come to decision-relevant best guesses and (2) be better able to identify which uncertainty would be most valuable to resolve and prioritize research efforts as a result. I encourage you to duplicate the model and make your own estimates, and to suggest alternatives and improvements to the (very rudimentary) methodology!
Excluding those ‘investment-like’ giving opportunities, my current best guess estimate is that a longtermist investor-philanthropist will on average be able to multiply the total impact of their funds by ~1.01 in one year and by >>10[1:1] in ten years.
I plan to look further into whether and to what extent this is the case. ↩︎
Incidentally, such a time would arguably (in expectation) have an above-average availability of high-impact giving opportunities, cf. the current situation as discussed under ‘Availability of opportunities’. ↩︎
An important consideration in the design is the (seeming) trade-off between preventing value drift and allowing for potential value improvement over time. An example of a way to balance those - in the case of a charitable investment fund - would be to appoint trustees that select their own successors. ↩︎
The short-term yearly value drift risk intuitively seems a lot lower than the yearly value drift risk beyond an investor’s lifetime. However, if an investor is able to appoint a successor that he/she deems to have at least as good values as him-/herself, the short- and longer-term risks are arguably very similar. ↩︎
To improve my estimates for the risk of loss and the risk of value drift and to learn more about what might help to minimize these risks, I aim to do a deeper dive both into relevant reference classes (e.g. UK charitable entities that invest a significant proportion of their assets) and case studies (e.g. waqfs). ↩︎
Granted, there are obvious difficulties in estimating one’s own expected value drift rate. ↩︎
For comparability between the estimates I’m considering benefits from direct mortality reduction. ↩︎
As an aside, note that the cost-effectiveness of the giving opportunities available to us might be correlated with the financial returns we are able to make on investment or the risk of expropriation at that particular time. This could both strengthen (it allows for mission hedging) or weaken (we might need the capital exactly when returns are low) the case for investment. However, note that this correlation would likely be a local one in time, whereas if one invests over a longer timescale, most of the financial returns may accrue by or beyond this point, meaning that this would only have a limited influence on the total philanthropic value achieved. ↩︎
This is a guess; I would welcome any available data on this. ↩︎
I haven't yet made estimates from a short-termist/person-affecting perspective, but intend to do so at a later point. ↩︎