Naively I would have thought that a double chance of getting half your assets expropriated would be approximately as bad as losing all of them.
Diminishing marginal utility means these two events are pretty different. According to the standard assumption of constant relative risk aversion, losing all your assets produces -infinity utility. I don’t think this is a realistic assumption, but it’s required to make the optimal consumption problem have an analytic solution. I’ve done some rough numeric analysis where the utility function is bounded below at 0 instead of at -infinity, and based on what I’ve seen, it generally recommends about the same consumption schedule. (I only did a super preliminary analysis, so I’m not confident about this.)
Similarly, organizations that avoid value drift will tend to gain power over time relative to those that don’t.
Perhaps it would be more accurate to say that an organization that avoids value drift and also consumes its resources slowly (more slowly than r - g) will gain resources over time.
Perhaps it would be more accurate to say that an organization that avoids value drift and also consumes its resources slowly (more slowly than r - g) will gain resources over time.
To check I’m understanding, is the key mechanism here the idea that they can experience compounding returns that are greater than overall economic growth, and therefore come to control a larger portion of the world’s resources over time?
Diminishing marginal utility means these two events are pretty different. According to the standard assumption of constant relative risk aversion, losing all your assets produces -infinity utility. I don’t think this is a realistic assumption, but it’s required to make the optimal consumption problem have an analytic solution. I’ve done some rough numeric analysis where the utility function is bounded below at 0 instead of at -infinity, and based on what I’ve seen, it generally recommends about the same consumption schedule. (I only did a super preliminary analysis, so I’m not confident about this.)
Perhaps it would be more accurate to say that an organization that avoids value drift and also consumes its resources slowly (more slowly than
r - g
) will gain resources over time.To check I’m understanding, is the key mechanism here the idea that they can experience compounding returns that are greater than overall economic growth, and therefore come to control a larger portion of the world’s resources over time?
That is correct.