Carl_Shulman

Comments

The case for investing to give later
  • My biggest issue is that I don't think returns to increased donations are flat, with the highest returns coming from entering into neglected areas where EA funds are already, or would be after investment, large relative to the existing funds, and I see returns declining closer to logarithmically than flat with increased EA resources;
    • This is not correctly modeled in your guesstimate, despite it doing a Monte Carlo draw over different rates of diminishing returns, because it ignores the correlations between diminishing returns and impact of existing spending: if EA makes truly outsized altruistic returns, it will be by doing things that are much better than typical, and so the accounts on which more neglected activities are the best thing to do now have higher current philanthropic returns as well as faster diminishing returns
    • Likewise, high investment returns are associated with moving along the diminishing returns curve in the future, as diminishing marginal returns are not exogenous when EA is a large share of activity in an area; by drawing investment returns and diminishing returns from separate variables, your results wind up dominated by cases where explosive growth in EA funds is accompanied by flat marginal returns that are extremely implausible because of the missing correlations
    • These reflect a general problem with Guesstimate models, it's easy to create independent draws of variables that are not independent of each other and get answers exponentially off as one considers longer time frames or more variables
  • Regarding prognostications of future equity returns, I think it's worthwhile to follow other fundamental projections in breaking down equity returns into components such as P/E, economic growth, growth in corporate profits as a share of the economy etc; in particular, this reveals that some past sources of equity returns can't be extrapolated indefinitely, e.g. 100%+ corporate profit shares are not possible and huge profit shares would likely be accompanied by higher corporate or investment taxes, while early stock returns involved low rates of stock ownership and high transaction costs
  • When there are diminishing returns to spending in a given year, being forced to spend assets too quickly in response to a surprise does lower efficiency of spending, so regulatory changes requiring increased disbursement rates can be harmful
  • Mission hedging and tying funding to epistemic claims can be very important for altruistic investing; e.g. if scenarios where AI risk is higher are correlated with excess returns for AI firms, then an allocation to address that risk might overweight AI securities
The case for investing to give later

GiveWell top charities are relatively extreme in the flatness of their returns curves among areas EA is active in, which is related to their being part of a vast funding pool of global health/foreign aid spending, which EA contributions don't proportionately increase much.

In other areas like animal welfare and AI risk EA is a very large proportional source of funding. So this would seem to require an important bet that areas with relatively flat marginal returns curves are and will be the best place to spend.

The case for investing to give later

I agree risks of expropriation and costs of market impact rise as a fund gets large relative to reference classes like foundation assets (eliciting regulatory reaction) let alone global market capitalization. However, each year a fund gets to reassess conditions and adjust its behavior in light of those changing parameters, i.e. growing fast while this is all things considered attractive, and upping spending/reducing exposure as the threat of expropriation rises. And there is room for funds to grow manyfold over a long time before even becoming as large as the Bill and Melinda Gates Foundation, let alone being a significant portion of global markets. A pool of $100B, far larger than current EA financial assets, invested in broad indexes and borrowing with margin loans or foundation bonds would not importantly change global equity valuations or interest rates.

Regarding extreme drawdowns, they are the flipside of increased gains, so are a question of whether investors have the courage of their convictions regarding the altruistic returns curve for funds to set risk-aversion. Historically, Kelly criterion leverage on a high-Sharpe portfolio could have provided some reassurance with being ahead of a standard portfolio over very long time periods, even with great local swings.

Improving the future by influencing actors' benevolence, intelligence, and power

Thanks for the post. One concern I have about the use of 'power' is that it tends to be used for fairly flexible ability to pursue varied goals (good or bad, wisely or foolishly). But many resources are disproportionately helpful for particular goals or levels of competence. E.g. practices of rigorous reproducible science will give more power and prestige to scientists working on real topics, or who achieve real results, but it also constraint what they can do with that power (the norms make it harder for a scientist who wins stature thereby to push p-hacked pseudoscience for some agenda). Similarly, democracy increases the power of those who are likely to be elected, while constraining their actions towards popular approval. A charity evaluator like GiveWell may gain substantial influence within the domain of effective giving, but won't be able to direct most of its audience to charities that have failed in well powered randomized control trials.

This kind of change, which provides power differentially towards truth, or better solutions, should be of relatively greater interest to those seeking altruistic effectiveness (whereas more flexible power is of more interest to selfish actors or those with aims that hold up less well under those circumstances). So it makes sense to place special weight on asymmetric tools favoring correct views, like science, debate, and betting.

How to make the most impactful donation, in terms of taxes?

Wayne, the case for leverage with altruistic investment is in no way based on the assumption that arithmetic returns equal median or log returns. I have belatedly added links to several documents that go into the issues at length above,.

The question is whether leverage increases the expected impact of your donations, taking into account issues such as diminishing marginal returns. Up to a point (the Kelly criterion level), increasing leverage drives up long-run median returns and growth rates at the expense of greater risk (much less than the increase in arithmetic returns).

The expected $ donated do grow with the increased arithmetic returns (multiplied by leverage less borrowing costs, etc), but they become increasingly concentrated in outcomes of heavy losses or a shrinking minority of increasingly extreme gains. In personal retirement, you value money less as you have more of it at a quite rapid rate, which means the optimal amount of risk to take for returns is less than the rate that maximizes long-run growth (the Kelly criterion), and vastly less than maximizing arithmetic returns.

In altruism when you are a small portion of funding for the causes you support you have much less reason to be risk-averse, as the marginal value of a dollar donated won't change a lot if it goes from $30M to $30M+$100k in a given year. At the level of the whole cause, something closer to Kelly looks sensible.

Investing to Give Beginner Advice?

E.g. the VIX, a measure of stock market volatility (and risk plays a role in formulae for leverage) is above 30 right now, close to twice the typical level. Although that's a quantitative matter, and considering future donation streams (which are not invested), pushes towards more (see the book Lifecycle Investing). But people shouldn't do anything involving leverage before understanding it thoroughly.

Investing to Give Beginner Advice?

This is a brief response, so please don't rush intemperately into things before understanding what you're doing on the basis of any of this. For general finance information, especially about low-fee index investing, I recommend Bogleheads (the wiki and the forum):

https://www.bogleheads.org/wiki/Main_Page

For altruistic investment, the biggest differentiating factors are 1) maximizing tax benefits of donation; 2) greater willingness to take risks than with personal retirement, suggesting some leverage.

Some tax benefits worth noting in the US:

1) If you purchase multiple securities you can donate those which increase, avoiding capital gains tax, and sell those that decline (tax-loss harvesting), allowing you to cancel out other capital gains tax and deduct up to $3000/yr of ordinary income.

2) You can get a deduction for donating to charity (this is independent of and combines with avoiding capital gains on donations of appreciated securities). But this is only if you itemize deductions (so giving up the standard deduction), and thus is best to do only once in a few years, concentrating your donations to make itemizing worthwhile. There is a cap of 60% of income (100% this year because of the CARES act) for deductible cash contributions, 30% for donations of appreciated securities (although there can be carryover).

3) You can donate initially to a donor advised fund to collect the tax deduction early and have investments grow inside tax-free, saving you from taxes on dividends, interest and any sales of securities that you aren't transferring directly to a charity. However, DAFs charge fees that take back some of these gains, and have restrictions on available investment options (specifically most DAFs won't permit leverage).

Re leverage, this increases the likelihood of the investment going very high or very low, with the optimal level depending on a number of factors . Here are some discussions of the considerations:

https://mdickens.me/2020/06/21/samuelson_share_predict_optimal_leverage/?fbclid=IwAR1E7WTtv3KAajK_bjlZc_49YbZB5MkK97RJc74qcC9urkgAEsKB0KIjYjw

https://reducing-suffering.org/should-altruists-leverage-investments/

https://forum.effectivealtruism.org/posts/g4oGNGwAoDwyMAJSB/how-much-leverage-should-altruists-use
https://docs.google.com/document/d/10oDwoulY6jR01ufewyO3XOQvA85Yys7LXWgTUrJt980/edit#heading=h.gl3bx4art973

My own preference would be to make a leveraged investment that can't go to a negative value so you don't need to monitor it constantly, e.g. a leveraged index ETF (e.g. UPRO, TQQQ, or SOXL), or a few. If it collapses you can liquidate and tax-loss harvest. If it appreciates substantially then donate the appreciated ETF in chunks to maximize your tax deduction (e.g. bunching it up when your marginal tax rate will be high to give up to the 30% maximum deduction limits).

Million dollar donation: penny for your thoughts?

My preference within this genre would be for something with more leverage and greater expected impact at the expense of local linearity. I'd especially call out the Center for Global Development, which has a history of policy wins that I think justify its budget many times over, and Target Malaria for work getting gene drives deployed to eliminate vector-borne diseases such as malaria. I'd prefer one dollar to these over multiple dollars to AMF, or the recommendations in the report.

How to make the most impactful donation, in terms of taxes?

In the US, you might also invest the money in high risk high return investments that are more likely to increase a lot or decline to near zero over time (e.g. a leveraged ETF, to limit your downside to your investment), hold them for a year or more, and then sell them to realize losses or donate the appreciated securities if they rise. This has several benefits:

  • If the investment declines, you get to take the loss and use it to reduce capital gains tax or deduct from ordinary income (up to $3000 a year) if you have no capital gains
  • If it appreciates you get the regular tax deduction (you can give up to 30% of income in appreciated assets), and also avoid capital gains tax
  • Because it is high risk, if it appreciates it is more likely to appreciate a lot, so when donated it will help you clear the standard deduction by a larger amount
  • The elevated expected returns can increase the expected value of your donation quite a lot (i.e.. on average you will give a lot more dollars, even though they will be concentrated in a smaller fraction of the possibilities)

Don't do this before reading up extensively, but here are several discussions of the issues from an altruistic perspective.

https://reducing-suffering.org/should-altruists-leverage-investments/

https://docs.google.com/document/d/10oDwoulY6jR01ufewyO3XOQvA85Yys7LXWgTUrJt980/edit#heading=h.gl3bx4art973

https://docs.google.com/document/d/10oDwoulY6jR01ufewyO3XOQvA85Yys7LXWgTUrJt980/edit#heading=h.gl3bx4art973

https://forum.effectivealtruism.org/posts/g4oGNGwAoDwyMAJSB/how-much-leverage-should-altruists-use

Load More