Low-Hanging (Monetary) Fruit for Wealthy EAs
Cross-posted to my website.
Ordinary wealthy people don’t care as much about getting more money because they already have a lot of it. So we should expect to be able to find overlooked methods for rich people to get richer.[1] Wealthy effective altruists might value their billionth dollar nearly as much as their first dollar, so they should seek out these overlooked methods.
If someone got rich doing X (where X = starting a startup, excelling at a high-paying profession, etc.), their best way of making money on the margin might not be to do more X. It might be to do something entirely different.
Some examples:
Sam Bankman-Fried increased his net worth by $10,000,000,000 in four years by founding FTX. He earned most of those zeroes by doing the hard work of starting a company, and there’s no shortcut around that. But, importantly, he managed to retain most of his original stake in FTX. For most founders, by the time their company is worth $10 billion or more, they only own maybe 10% of it. If Sam had given away a normal amount of equity to VCs, he might have only gotten $2 billion from FTX instead of $10 billion. In some sense, 80% of the money he earned from FTX came purely from retaining equity.[2]
(Bill Gates might be another person who got richer than usual by retaining ownership.[3])
Warren Buffett is an investing genius. But if he had only been an investing genius, he would have made a lot less money. In addition to earning high investment returns, he borrowed money at below-market interest rates using insurance float. That let him compound his returns much faster than he otherwise would have.
Long-Term Capital Management was an extremely successful hedge fund (at least until it blew up, but let’s not talk about that part). Much of its success didn’t come from its trading strategies, but from the fact that it negotiated unusually favorable deals with its banking partners.
A quasi-example: Instead of trying to make more money, try to (legally) pay less tax. This idea is not exactly overlooked, so it’s not a central example of what I’m talking about. But I have noticed that most “normal-level” rich people (with between $1 million and $10 million) don’t pay nearly enough attention to taxes. I know a lot of people who could save $10,000 to $100,000 per year with 20 hours of work or less.
In these examples, it’s not necessarily that the person (or company) came up with a trick that nobody else had thought of. Obviously every startup founder would love to retain as much of their stock as they can. But they usually have to choose between giving up equity and running out of funding, and they rightly choose to keep their company alive. My point isn’t that it’s easy. My point is that, on the margin, EA founders should probably pay more attention to retaining equity. Maybe a founder could do some extra work and find a way to keep 11% of their equity instead of 10%, without meaningfully reducing their startup’s chances of success. Getting that extra 1 percentage point of equity might be a lot easier than raising the company’s ultimate valuation by 10%.
Wealthy EAs care more about marginal dollars than ordinary wealthy people, and they can take advantage of that fact. They can look for (relatively) easy ways of getting money. I only spent about five minutes coming up with the examples I gave, so I’m sure there are plenty of other ideas.
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For people with about average wealth, the best way to get more money is usually the obvious thing: get a higher salary. But there are still some neglected strategies. One that comes to mind is salary negotiation.
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The mathy way to say this is that, on a logarithmic scale, most of his wealth came from doing the hard work. But on a linear scale, it mostly came from retaining equity. If most people have logarithmic utility of money but you have linear utility, that changes how you should behave.
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Elon Musk did something sort of similar, where he got the Tesla board of directors to grant him highly leveraged call options. When Tesla stock went up, Elon Musk’s net worth went up by even more.
I’m not sure what you mean by ‘ordinary’ wealthy people (vs ‘altruistic’ wealthy people?) but I’d be pretty surprised if there were overlooked methods. In my experience (ordinary) wealthy types spend lots of time talking to other wealthy types and swap notes on how best to do the most with their money. Because they have more money, it can make sense to hire people to help you save it, eg tax accountants. In short, I reject the premise that most wealthy people are just not trying to make themselves wealthy and therefore there are $20 bills on the sidewalk for wealthy people who really care about helping others.
I’m not convinced by the examples either. I’m assuming the case with Sam Bankman-Fried is that his business didn’t require as much external investment, rather than (with no offense to him) he has remarkable negotiating skills basically all other entrepreneurs lack.
Thanks for the post. I agree EAs should have lower decreasing marginal utility for money, since they can never be satisfied by it—as you can always help someone else.
On the other hand, I’m not sure you invoke the best examples. First, LTCM collapsed in 1998 (despite being managed by genius economists) and had a bad effect on financial markets; this shows that trying to earn a lot of money entails risks and externalities.
Second, I’m not sure what’s your source for this premise:
A possible source is Kahneman & Deaton, but if that’s the case, this paper: a) has been criticized by more recent studies, and b) is not focused on very wealthy people, which are a very special class of individuals. Actually, I’d say that people who become really wealthy (by themselves) already tend to have lower diminishing marginal utility for money—or they would work so hard to do so.