Thanks so much for such a thorough and great summary of all the various considerations! This will be my go-to source now for a topic that I’ve been thinking about and wrestling with for many years.
I wanted to add a consideration that I don’t think you explicitly discussed. Most investment decisions done by philanthropists (including the optimal equity/bond split) are outsourced to someone else (financial intermediary, advisor, or board). These advisors face career risk (i.e. being fired) when making such decisions. If the advisor recommends something that deviates too far from consensus practice, they have to worry about how they can justify this decision if things go sour. If you are recommending 100% equities and the market tanks (like it did last year), it’s hard to say ‘But that’s what the theory says,’ when the reflective response by the principal is that you are a bad advisor because you don’t understand risk. Many advisors have been fired this way, and no one wants to be in that position. This means tilting toward consensus is likely the rational thing to recommend as financial advisors. There are real principal-agent issues at play, and this is something acutely felt by practitioners even if it’s less discussed among academics.
I suspect the EA community is subject to this dynamic too. It’s rarely the asset owners themselves who decide the equity mix. Asset allocation decisions are recommended by OpenPhil, Effective Giving, EA financial advisors, etc. to their principals, and it’s dangerous to recommend anything that deviates too far from practice. This is especially so when EA’s philanthropy advice is already so unconventional and is arguably the more important battle to fight. It can be impact-optimal over the long term to tilt toward asset allocation consensus when not doing so risks losing the chance to make future grant recommendations. The ability to survive as an advisor and continue to recommend over many periods can matter more than a slightly more optimal equity tilt in the short term.
Keynes comes to mind: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Thanks so much for such a thorough and great summary of all the various considerations! This will be my go-to source now for a topic that I’ve been thinking about and wrestling with for many years.
I wanted to add a consideration that I don’t think you explicitly discussed. Most investment decisions done by philanthropists (including the optimal equity/bond split) are outsourced to someone else (financial intermediary, advisor, or board). These advisors face career risk (i.e. being fired) when making such decisions. If the advisor recommends something that deviates too far from consensus practice, they have to worry about how they can justify this decision if things go sour. If you are recommending 100% equities and the market tanks (like it did last year), it’s hard to say ‘But that’s what the theory says,’ when the reflective response by the principal is that you are a bad advisor because you don’t understand risk. Many advisors have been fired this way, and no one wants to be in that position. This means tilting toward consensus is likely the rational thing to recommend as financial advisors. There are real principal-agent issues at play, and this is something acutely felt by practitioners even if it’s less discussed among academics.
I suspect the EA community is subject to this dynamic too. It’s rarely the asset owners themselves who decide the equity mix. Asset allocation decisions are recommended by OpenPhil, Effective Giving, EA financial advisors, etc. to their principals, and it’s dangerous to recommend anything that deviates too far from practice. This is especially so when EA’s philanthropy advice is already so unconventional and is arguably the more important battle to fight. It can be impact-optimal over the long term to tilt toward asset allocation consensus when not doing so risks losing the chance to make future grant recommendations. The ability to survive as an advisor and continue to recommend over many periods can matter more than a slightly more optimal equity tilt in the short term.
Keynes comes to mind: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”