Risk Premiums

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Risk Premiums

Postby EmbraceUnity on 2009-07-11T01:47:00

Alan Dawrst argued that we should take the money we plan to donate and put it into investments with high risk premiums and then donate the winnings if there are any, because the expected utility is higher.

Is it possible that we could set up some collective and transparent investment fund to do this?

I personally don't think the investments would need to be tied to ethical investments, since I think the rules by which investors play by must be changed for any real progress to occur. To be honest, virtually all transactions have negative externalities which we barely even think about. Though, certainly, all else being equal, ethical investments are better. The only real utilitarian justification for a blanket rule enforcing ethical investing for this hypothetical investment fund is the necessity to appear more pure for public relations purposes.

Of course, if the expected utility is higher regardless of the amount, and the transaction costs are low enough, there is no need for pooling resources

Does anyone have any ideas for investments with high risk premiums? All I can think of are IPOs and Angel Investments.... and with regard to those, ethical investing actually makes more of a difference in potentially getting a noble enterprise off the ground.

Thoughts?

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Re: Risk Premiums

Postby Brian Tomasik on 2009-07-15T23:01:00

Thanks for the note, EmbraceUnity!

I should point out that in many cases, I think the return on investment of a charitable donation itself can exceed that of capital markets. For instance, giving to Vegan Outreach means creating more supporters of animals who are aware of the organization, which leads to more funding. Also, as Gaverick noted here, charitable fundraising may have a 400% return over its lifetime. Why more organizations don't do more of it, I'm not sure -- I think the main reason is that it would look bad to prospective donors, especially those using charity-rating services that score based on "fraction of budget spent on program expenses."

But, as Gaverick points out, there is sometimes a good reason to invest: To wait until you've done more research on where you should give. During that time, it may well be optimal to maximize your expected return by choosing investments with higher systemic risk. Of course, the extent to which the correlation between systemic risk and expected return holds in practice is debated in the academic literature, but absent particular reasons to think otherwise, it doesn't seem like a bad theoretical construct to use. I don't think it would be wise to spend time researching the best particular investments in detail (beyond, say, picking small-cap stocks over bonds), not because the efficient market hypothesis holds perfectly in the real world, but because so many other people, not just utilitarians, are trying to "beat the market" that the reward-to-effort ratio for doing so is pretty small. In contrast, there's nothing close to an efficient market for charitable cost-effectiveness, so that's where the real gains from research can be found.

I agree with you about ethical investing, mainly just because the higher expense ratios of the funds probably aren't worth it -- that money could in many cases be better spent on the charities themselves. At least, I'm skeptical of the cost-effectiveness of ethical investing because I think its origins are largely from non-consequentialist notions about "not participating in evil," so there's less reason to think a priori that it's justified purely on consequentialist grounds.
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Re: Risk Premiums

Postby EmbraceUnity on 2009-07-16T05:08:00

Excellent points!

Alan Dawrst wrote:Also, as Gaverick noted here, charitable fundraising may have a 400% return over its lifetime. Why more organizations don't do more of it, I'm not sure -- I think the main reason is that it would look bad to prospective donors, especially those using charity-rating services that score based on "fraction of budget spent on program expenses."


Of course charity is partially a zero-sum game. A lot of the people you will convince with fundraising efforts are people who are already in the habit of donating, thus simply diverting donations from one charity to another. Of course if you are confident your charity has a higher expected utility, then it is justifiable.

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Re: Risk Premiums

Postby Brian Tomasik on 2009-07-16T22:10:00

EmbraceUnity, I agree with all of your points. In fact, similar ideas were discussed in the comments here.
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Re: Risk Premiums

Postby RyanCarey on 2009-07-17T08:12:00

I'm skeptical of the cost-effectiveness of ethical investing because I think its origins are largely from non-consequentialist notions about "not participating in evil,"

Yes, I strongly agree. Although, I would still regard non-consequentialist business ethics as preferable to a lack of business ethics.

I agree also with the idea that spending money on fundraising for more money (charitable fundraising) looks attractive. With such return on investment, it must be hard to reject. However, we must bear in mind some disadvantages.
> The public are already irritated by how charities continually demand money. The requests of charities are becoming boring.
> Although charitable fundraising may attract money, it may desensitise its audience so that they donate less money to other charities. (I admit that this objection is very speculative)
> Charitable fundraising is not a sexy option. People want their money to go straight to people in need. Although for irrational reasons, the public prefer charities to have low overheads as a percentage of their revenue.

Another way of looking at charities on a meta-level is with charities that provide information about making philanthropy effective. e.g. GiveWell informs philanthropists and is favoured by Peter Singer.
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Re: Risk Premiums

Postby Arepo on 2009-07-17T11:24:00

Givewell also pool donations so that they can give under better terms to diversified charities.
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Re: Risk Premiums

Postby Brian Tomasik on 2009-07-18T22:29:00

RyanCarey wrote:> Charitable fundraising is not a sexy option. People want their money to go straight to people in need. Although for irrational reasons, the public prefer charities to have low overheads as a percentage of their revenue.


Exactly. So, for utilitarians and other expected-value maximizers, it may be advantageous to direct all of one's donation toward fundraising or other activities with high internal rates of return.

The point about meta-charities is an excellent one.
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Re: Risk Premiums

Postby RyanCarey on 2009-07-19T01:58:00

Alan Dawrst wrote:
RyanCarey wrote:Charitable fundraising is not a sexy option. People want their money to go straight to people in need. Although for irrational reasons, the public prefer charities to have low overheads as a percentage of their revenue.


Exactly. So, for utilitarians and other expected-value maximizers, it may be advantageous to direct all of one's donation toward fundraising or other activities with high internal rates of return.

Yep. I think you're right. The unattractiveness of providing money for fundraising is not a disadvantage at all. It's an irrational psychological obstacle to doing the right thing. The fact that others are deterred from providing money for fundraising probably means we should try to pick up the slack.
After identifying such biases (e.g. the unnatractiveness of providing money for fundraising), we can compensate for them. This is probably not just true on a societal level, but also on an individual level. For example, we are probably excessively lenient towards the eating of animals because we are biased by their tastiness.
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Re: Risk Premiums

Postby DanielLC on 2009-07-19T03:58:00

I'd like to point out that the market normally doesn't make risky investments cheaper per se. If the risks are independent it doesn't add. For example, suppose you invest in one share of 100 penny-stock companies that each have an equal chance of being worth one dollar or nothing. There is a mean of $50 and a standard deviation of $2.50. There is a 95% chance of getting between $45 and $55. If you get $10,000 of them, the mean is $5,000 and the standard deviation is $25. You have a %95 chance of getting between $4,950 and $5,050, and a %99.99 of getting between $4,900 and $5,100.

The key here is getting ones that are the extreme of the market. If the market goes up, this goes up faster. If the market goes down, this goes down faster. I know stock options work like that, but I wonder if there's anything better.
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Re: Risk Premiums

Postby Brian Tomasik on 2009-07-19T13:57:00

Thanks for the note, DanielLC. Yes, "risky investments" is short for "investments with high systemic risk (non-diversifiable risk)," as in the CAPM. You're right that call options have high betas, though whether they have high expected returns is unclear.
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Re: Risk Premiums

Postby Recumbent on 2013-05-28T22:50:00

This TED talk supports the idea that fundraising is under-invested in:
"Dan Pallotta: The way we think about charity is dead wrong."
But then there is "Is most fundraising counterproductive?" at 80,000 hours...

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Re: Risk Premiums

Postby Ruairi on 2013-05-29T08:51:00

Returns from fundraising might not be insane, but their probably still excellent, and if you work for an incredible cause you can worry less about shifting the money :)

Tbh from the (few) people I talked to in the charity sector when I first was learning about fundraising I got the impression that they just hadn't really thought about it that much... There aren't penalties in the charity sector for being less effective in the same way there are in the private sector, and I think this might actually be a reasonably big factor in why charities don't fundraise more, etc.

/anecdote

"Although the average returns to fundraising are high, it looks like the returns from additional fundraising are much lower. We can show this with a very rough calculation:

In 2006, charities in the UK raised an estimated £27bn from fundraising (3). They spent about £5.7bn on fundraising (4)

In 2010, charities raised £31bn (5). They spent £7.8bn on fundraising (6). (inflation-adjusted)

So, over this time, an extra £2.1bn was spent on fundraising, raising an extra £4bn. If you assume the extra fundraising led to this increase, then it made a profit of £1.9bn - a return of 90% (7) (8)."


http://80000hours.org/blog/92-why-don-t ... undraising
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Re: Risk Premiums

Postby DanielLC on 2013-05-29T18:24:00

There is some talk on here about fundraising being a zero sum game. That doesn't really matter much, considering that most charities suck. All that matters is how much it changes how much people donate to good charities, which I doubt is much.

For example, if 50,000 gets donated to the Fred Hollows Foundation instead of Seeing Eye, it's the same as $49,950 donated to the Fred Hollows Foundation. The effect of Seeing Eye is lost in rounding.
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Re: Risk Premiums

Postby Ruairi on 2013-06-01T09:22:00

DanielLC, can you elaborate please? At absolute worst the returns on fundraising seem to be ~90%
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Re: Risk Premiums

Postby DanielLC on 2013-06-01T22:16:00

I mean that fundraising just gets people to donate to you instead of other charities. If all charities were equal, this would mean that fundraising would appear useful, but be useless. Since most charities suck, fundraising is almost as useful as it looks for the good charities, and actually bad for the lousy ones.
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Re: Risk Premiums

Postby Ruairi on 2013-06-02T07:32:00

Right :D! But also fundraising creates more total donated money:

"Although the average returns to fundraising are high, it looks like the returns from additional fundraising are much lower. We can show this with a very rough calculation:

In 2006, charities in the UK raised an estimated £27bn from fundraising (3). They spent about £5.7bn on fundraising (4)

In 2010, charities raised £31bn (5). They spent £7.8bn on fundraising (6). (inflation-adjusted)

So, over this time, an extra £2.1bn was spent on fundraising, raising an extra £4bn. If you assume the extra fundraising led to this increase, then it made a profit of £1.9bn - a return of 90% (7) (8)."


http://80000hours.org/blog/92-why-don-t ... undraising
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Re: Risk Premiums

Postby CosmicPariah on 2013-06-03T18:56:00

Why haven't any other charities just fundraised a bunch and taken over the world with those kind of returns? It must be that people would get pissed off if you looked like you were doing something zero sum.

Might it be that charities actually are spending the right amount on fundraising given that we don't know the bounds on this? Industries tend to be efficient, but perhaps this one wouldn't be because most people are not consequentialists and would be averse to these methods?

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