Event-driven mission correlated investing and the 2020 US election

[jh]

Suppose we are in November 2020 and you are a climate-focused donor who plans to donate $1 million to the Founders Pledge Climate Change Fund (CCF).

If Biden wins the election then, based on your research, you expect the effectiveness of your donation will rise by about 10x. Suppose the baseline cost-effectiveness of the CCF is roughly $1/​tCO2e (tonne of CO2 equivalent), so under Biden you expect it to be better at $0.1/​tCO2e. Also, suppose that in either case, Biden or Trump, you see ‘investing to give’ as less effective than donating now (at least with this money you have earmarked for giving now).

You believe Biden has a 70% chance of winning (see NYT article). You see that on Betfair you can get 1.5:1 odds on Biden.

If you just donate, then your donation averts 7.3 million tCO2e in expectation (see below the main post for the calculations).

But if you bet $1m on Biden, with the commitment to donate the potential $1.5m win, then your expected impact is to avert 10.5 million tCO2e.

So, because almost all the impact you expect from your donation occurs when Biden wins, you can increase your expected impact by more than 40%.

This is an example of event-driven mission hedging. That is, investing around an event in a way such that your returns are correlated with the effectiveness of how you intend to use them.

If you already thought that donating to CCF was the best use of your money at the time, then with this mission hedging strategy you would think it is even better. It is also possible that if you didn’t think CCF was your best donation option before, then with this strategy it might become your best option—see ‘More general context’ below for a discussion of this.

Many people might not feel comfortable using this mission hedging strategy. If you lean in this direction, I’d welcome it if you share your reasoning. I’d encourage you to not simply disagree with the numbers—they are plausible and documented, but ultimately only illustrative. Rather, conditional on having these beliefs at the time, are there other factors that would cause you to avoid this strategy?

For others, the fact that this strategy is emotionally unattractive to many, and hence neglected, makes it all the more attractive to consider. Hauke Hillebrandt wrote a comprehensive introduction to mission hedging several years ago. Yet practical uptake and application seems to have been slow, except perhaps among some AI investors. A minor indicator of this is that there was no EA Forum tag for ‘mission hedging’ until I added one for this post. Further exploration of this concept seems worthwhile, whether for short-horizon strategies like in this post or long-horizon ones like ‘buy AI stocks’.

Prediction markets are helpful in the case I’ve presented here because they offer a direct trade on an event which is expected to dramatically affect CCF’s effectiveness. I’ve talked about $1 million here just to emphasize that this strategy could have been applied at this scale. Traditional financial markets could be used to apply this strategy more frequently and at greater scale, but with less clear correlations between financial returns and effectiveness. Just like with regular event-driven trading this strategy requires expertise. Altruistic investors could hire traders to spot events that are likely to influence effectiveness in their priority cause areas and make corresponding trades.

Would you have tried this strategy last November? Did you?

Acknowledgements

Thanks to Hauke Hillebrandt and Johannes Ackva for helpful comments on earlier drafts. This of course does not imply their endorsement of all aspects of this post.

Additional notes

Main calculations

The expectation for just donating is

$$\text{\$1 million}\ast \left(70\%/\right(\$0.1/tCO2e)+30\%/(\$1/tCO2e\left)\right)=\text{7.3 million tCO2e}$$

The expectation for mission hedging is

$$\text{\$1 million}\ast 1.5\ast 70\%/\left(\$0.1/tCO2e\right)=\text{10.5 million tCO2e}$$

More scenario analysis

If your probability for a Biden win was 90% the expected return on the bet, with the same odds, rises to 48%. It falls to 36% for a win probability of 50% - this shows there is value in mission hedging even if the odds on offer are worse than what you would consider fair.

Similarly, sticking with a 70% probability as a reference point, the expected ‘return’ on the mission hedging bet falls to 28% if you could only get 1.33:1 odds on Biden. But, according to the New York Times, there were times during the election when the odds were as much as 7:1. With those odds the expected mission hedging return would be 571%.

More general context

Another consideration is that while a second Trump term may make US-focused advocacy less effective, it could make donating to climate change efforts globally more valuable^[1]. Or, if global climate progress is made less tractable under Trump, then it may be most effective to simple switch cause area in this scenario. Or only switch into climate if Biden wins.

Suppose that normally you are a consistent donor to a GiveWell top charity (GWC). However, you have looked into CCF and while you believe that under another Trump term it will only be 0.2x as effective as the GWC, in the scenario of Biden’s first year it will be 2x GWC^[2].

If you wait for Biden to win and donate to CCF, and otherwise continue with your GWC donation, the expected value is equivalent to 1.7 million dollars to the GWC.

If you do the mission hedging bet (with the original odds and probability from above) then the expected value is equivalent to 2.1 million dollars to GWC.

So there is still a 24% expected ‘return’ to mission hedging in this more general context.

General formula

$$p=\text{your probability for the event that leads to high effectiveness}$$$$q=\text{multiplier for increased effectiveness, relative to baseline of 1}$$$$p_b=\text{probability equivalent to the odds}$$$$c=\text{transaction costs as a percentage of amount bet}$$

Then

$$\text{EV of normal donation}:V_N=p\ast q+(1-p)$$

$$\text{EV of mission hedged donation}:V_{MH}=\frac{p}{pb}\ast (1-c)\ast q$$

So

$$\text{Mission Hedging multiplier}:M_H=\frac{V_{MH}}{V_N}=\frac{\frac{p}{pb}\ast (1-c)\ast q}{1+p\ast (q-1)}$$

It helps to consider some particular cases,

$$\text{Limit where p*q large}:M_H\approx (1-c)/pb$$

$$\text{Limit where p is small}:M_H\approx \left(p/pb\right)\ast (1-c)\ast q$$

Naturally $M_H$ will be higher for greater $q$ and smaller $c$ and $p_b$. Additionally betting on unlikely events with low $p$ (and low $p_b$ to match) seems most valuable. For example, if Biden was a 10:1 underdog and you agreed so $p=0.1$, then $M_H=5.26$.

What events-based mission hedging requires

• Ability to forecast how the outcome of an event (election, court case, …) will change the cost-effectiveness of donations to a particular organization or cause area

• For one outcome of the event to lead the target organization to have higher cost-effectiveness than alternative donation opportunities

• A reasonably liquid investment whose financial returns are highly correlated with the event

---

1. ↩︎

   Note that CCF is a global fund, so it would indeed most likely switch from a US focus to a global focus in this case.

2. ↩︎

   A back of the envelope way to actually arrive at these multipliers as a rough but genuine assessment is to take the Mortality Cost of Carbon of 2 x 10-4 excess deaths /​ tCO2e from Bressler (2020) and multiply it by the $1 /​ tCO2e cost-effectiveness as a baseline for CCF that I used in the main text. Then at baseline level CCF would seem to have cost-effectiveness of $5,000 /​ life saved. GiveWell’s most recent explicit cost per life saved estimates for specific projects of their top charities range from $783/​life to $9207/​life.

[jackva]

Interesting!

Some decision points in climate that could be interesting to use this for:

* 2021 German elections (which will impact EU climate policy, though it is a bit unclear in which direction)
2022 US mid-term elections (more value if Democrats can beat the odds and keep Congressional majority)

[Neel Nanda]

Interesting idea, and thought-provoking post, thanks!

I find it odd to call this mission hedging though. It feels more like mission anti-hedging—I want to be maximally risk seeking and go all in to have more money in the world where my cause is doing better.

[jh]

Great point and perhaps more interesting than you might have expected.

To repeat back what I think you meant, what I’ve called the mission hedging strategy for this case makes the two possible outcomes 15 vs 0. While for just donating the possible outcomes are 10 vs 1. So actually the variance of outcomes is higher. It’s more like anti-hedging.

First, this depends on how happy you are about Biden v Trump for other reasons. If a Biden win is worth +100 in utility for you and Trump −100, then the mission hedging outcomes are 115 & −100, whereas for simply donating the outcomes are 110 & −99. However, if a Biden win is a −100 for you, and Trump +100, then mission hedging outcomes are −85 & 100, whereas simply donating gets outcomes of −90 & 101. So, in the latter case, the spread between outcomes is actually lower for the ‘mission hedging’ strategy.

Next, assuming you prefer a world with Biden as president, then this is absolutely correct. This strategy is the opposite of a hedge in the sense that it increases the variance of outcomes. So, perhaps a better term would be ‘mission leveraging’. Or mission anti-hedging.

Nevertheless, I’d propose that ‘Mission hedging’ is useful as an umbrella term. One that captures both hedging and ‘anti-hedging’. The broad category of ‘mission hedging’ may sometimes involve actual ‘hedges’ (such as investing in evil, like in Hauke’s post) and other times the optimal strategy looks more like ‘mission leveraging’.

The literature on these ideas seems to be at an early stage and small enough that if we agreed on another name then we could run with it. But the main reasons I’d propose ‘Mission hedging’ as an umbrella term are:

1. Practical precedent. Practically, this is just like some hedge funds actually hedge and others make highly leveraged, unhedged bets (and these aren’t actually mutually exclusive). But the umbrella term is ‘hedge’ funds.

2. Academic context. Mathematically, this class of strategies arise from second-order terms related to the covariance between financial returns and the marginal utility (of giving). Sometimes these terms will push to variance reducing ‘hedges’. Other times they will push in favour of investments that are more like leverage. The direction this goes depends on the correlation between returns and the background world state (e.g. for this post, how does Biden/​Trump change your utility aside from climate?). Either way these terms define a category of strategies that is about social-financial correlation and not just about first-order things like increasing returns or effectiveness. So, it is nice to be able to refer to these terms with an umbrella term like mission hedging. The original ‘mission hedging’ paper by Roth-Tran uses this term.

3. Existing usage within EA. Last but not least, the distinction between hedging and anti-hedging doesn’t seem to be made in most existing EA usage (this doesn’t mean the distinction shouldn’t be made, but it’s not currently). For example, I would say that Holden’s recent public discussion of mission hedging didn’t involve a claim about whether transformative AI happening sooner is inherently good or bad for the world, just that Open Philanthropy would like to have more money sooner in worlds where this occurs. Whether or not investing in AI as a ‘mission hedge’ is truly a ‘hedge’ or an ‘anti-hedge’ depends on whether or not transformative AI happening sooner is bad or good.

So, I think the point about ‘anti-hedging’ is really interesting, at least philosophically. And if someone has an idea for a better umbrella term than ‘mission hedging’, then I’d be happy to use it. But, for the reasons above, I think it may be here to stay.

[jh]

@Neel Nanda. Quick update: I’ve now discussed this offline with a bunch of people who are considering potential strategies of this nature. It seems to me that ‘mission-correlated investing’ is a better umbrella term for these strategies that work with financial-mission correlations to enhance expected value. ‘Mission hedging’ strategies would be the subset of mission-correlated strategies that both increase expected value and reduce the variance of outcomes.

[Daniel_Eth]

If you expect your donation to be ~10x more valuable if one political party is in power, then it probably makes more sense to just hold* your money until they are in power. I suppose the exception here would be if you don’t expect the opportunity to come up again (eg., if it’s about a specific politician being president, or one party having a supermajority), but I don’t see a Biden presidency as presenting such a unique opportunity.

*presumably actually as an investment

[jackva]

We have two things going on here beyond just partisan switch (discussed in more detail in the report) that do make this a special moment unlikely to re-occur.

(1) Elevated importance: The importance of the 2020 election for climate policy was much elevated because of COVID-related stimulus spending, the difference between Trump-Biden is much starker than the difference Trump-Clinton was in 2016 because of the much enlarged policy opportunity.

(2) Carbon lock-in: the leverage that US climate policy has is declining sharply as its main benefits in terms of global emissions (effects on emissions globally through innovation and global leadership) is becoming less valuable every year as more and more of future emissions get locked-in by infrastructure and long-lived capital asset decisions in emerging economies.

[Daniel_Eth]

Good points.

[jh]

Thank you jackva. Great points on this specific example.

In general, suppose we didn’t think this was a special moment. Then essentially this means we think ‘investing to give’ also presents a good opportunity. If ‘investing to give’ is also 10x CCF under Trump, then indeed you would want to just wait and either give under Biden or invest to give. But if ‘investing to give’ is only 5x CCF, then we’re in the scenario I discussed under ‘More general context’. So, fair point, I have added a sentence to the main post to explicitly rule out ‘investing to give’ being a consideration.

I’d be most interested to see people’s objections conditional on accepting a scenario where mission hedging seems like a valuable opportunity. Like the one I have tried to illustrate around last year’s election. Are there somehow more fundamental intuitions for why you would not pursue such a strategy?

[Sjir Hoeijmakers🔸]

Thanks for this post jh. It’s an interesting idea that indeed seems worth exploring more. As an aside/​Just musing, I wonder whether there are opportunities to correlate things that we’d like to be correlated with each other beyond philanthropy, e.g. in our careers or personal lives.

[jh]

Thanks Sjir. Interesting thought to muse on.

Just quickly riffing on the example in this post, if you have a great business idea that will only work under one politician you might bet on them. Or if you think one politician will be good for your current job, but the other could make it optimal for you to retrain and change jobs, then bet on the other. Or if one will make you want to leave the country, then bet on them to help with your moving costs.

[NunoSempere]

I think you’d have to think about the market equilibrium here. So for instance, if the price of capturing a tCO2e falls to $0.1/​tonne, then more people will want to buy them, and the impact of a marginal tonne captured [1] might be lower. More generally, more people would be doing climate related projects, because the administration would be more welcoming of them.

In contrast, under $1/​tonne, less people might want to buy them, and thus the marginal impact of a tonne captured might be higher. Similarly, perhaps fewer people would choose to carry out climate related projects, so the ones that exist might be more valuable.

Would it be 10x higher? No, probably not, but then again a presidency probably wouldn’t make carbon capture 10x more cost-effective (maybe 1.2x? I’m just shooting from the hip here).

[1]: or, closer to my own heart, the Shapley value of each tonne captured.