Should Effective Altruists make Risky Investments?
Normal investors are risk averse and engage in temporal discounting. Effective Altruists should be risk neutral expected return maximizers.
Effective altruists are people who use evidence and reason to find the most promising causes to work on and use their time and money to do the most good they can. There are a number of difficult decisions that need to be made if one is looking to maximize well-being. Aside from which charities are the best, another important but potentially less considered decision is deciding when to give your money.
Why wait? Waiting to hand over your money to the charity means you can invest in the meantime. Investing has an expected return which ought to be evaluated against the cost of waiting to donate. It could be the case that $10 does 10% less good per year. If investing returns 5% annually, then spending immediately is the better decision because even if I have 5% more next year, my money does 10% less good. However, if every year, $10 does 4% less good but you can make 5% return on your money, you should be investing. If you think it is better to invest, you are a patient philanthropist.
An effective altruist who was concerned that she was being ineffective with her money by giving immediately could argue that it is better to spend immediately because mosquito nets, vaccines and clean water won’t always be scarce. At which point, it’ll be more expensive to save lives. It could also be the case that when you save lives, you generate more future good because those people live to work and help others. That might be true but this doesn’t get the effective altruists off the hook from considering when to donate their money. If money spent now is worth more in terms of good it can do, it may be efficacious to actually take out loans to donate immediately and then pay the money back in the future.
It may also be the case that there are global crises which provide an opportunity for doing good for cheap. Perhaps there is a major disease outbreak and medicine is extremely cheap but scarce in the area at the time due to poverty. The price of saving a life could fall drastically. One strategy would be waiting until an opportunity like this to donate.
If an altruist decides to invest, how should they think about investing? Investors are concerned about risk. Most people exhibit some form of what is called risk aversion but the effective altruist shouldn’t do this. Imagine that you have $50 and I offer a deal. I will flip a coin and if it is heads, I double the money. But if it is tails, I take your $50. The expected value of this is (.5)*100 + (.5)*0 = $50. If you are risk neutral, you don't care whether you take the deal or not. If you are risk averse, you don't take the deal. You would rather have the $50. It may be the case that you are so risk averse you might not even take a deal in which the outcomes are $0 and $120. The expected return would be (.5)*$0 + (.5)*$120 = $60 but you still are unwilling because the losses weigh heavily in your mind.
A normal person exhibits some risk aversion. As people get older and closer to retirement, they become more risk averse to preserve their wealth. Huge market fluctuations are anxiety inducing if you don’t have a source of income outside of the wealth generated by your portfolio. A 24 year old who is wiped out by a stock market crash is in a bad position but nowhere near as bad a position as a 64 year old who was planning to retire next year.
In my view, despite the natural human inclination, the effective altruist should be risk neutral. She shouldn’t be optimizing for her own preferences but to get as much money as she can to donate. Risk aversion will lead to lower potential return. Lower return means less expected good that is accomplished.
However, there is an exception to this. If the donation received by the effective altruist is so tremendously large as to change the price of doing good. This would mean that the curve of doing good is steep at the margin. For example, if I were to make my donation and the price of doing good increases from $100 per unit of good to $200 per unit of good, then risk aversion may be warranted. This is unlikely to be the case because the amount of good that can be done is enormous and the donations from one effective altruist is relatively minuscule, especially if we consider animal welfare.
Effective altruists could make an argument that future good is not as important as present good. There is a natural inclination among people to be high time preference. Not enough people save money for retirement because they discount the future and act impulsively. However, effective altruists motivated by utilitarianism should not have a higher time preference for utility now than in the future. They should be time neutral.
Since effective altruists are risk neutral and are not high time preference, they will not behave like normal investors. Effective altruists should take what would normally be considered risky investments, provided that they have a higher expected return. It would be wise to hold no bonds and potentially hold over 100% of their portfolio in stocks by employing leverage. It may even be possible that effective altruists should purchase cryptocurrency as a highly speculative but potentially extremely high return investment despite the fact that it would seem very irresponsible.
Interesting premise! Love to see more people discuss the topic of EA.