I don’t think your treatment of risk for altruists is right. What matters is the correlation of your investment with available philanthropic capital: it’s not necessarily a big deal if you lose 100% of your investment, but it is a big deal if your portfolio underperforms when the market underperforms, because all of the donors are losing money at the same time.
So you are basically making a judgment call about whether other donors to your cause are over- or under-exposed to the market. It’s a fine call to try to make, but you should be aware that that’s what it is.
In the world of rational donors, big charities, and CAPM, the result is that the risk-adjusted returns to the risky asset and the risk-free asset become equal for altruists, regardless of their portfolio composition. Then other idiosyncratic considerations kick in, and you end up with widely varying individual allocations. But the overall allocation is just the same as if there were one giant philanthropist.
but it is a big deal if your portfolio underperforms when the market underperforms, because all of the donors are losing money at the same time.
Doesn’t it depend how much the charity is risk-averse? If the charity’s value as a function of wealth were completely linear (which isn’t true in practice), then these correlations wouldn’t matter, only expected income.
I don’t understand your last paragraph. Feel free to clarify if it’s worth the trouble. :)
Yes, it depends on whether there are diminishing marginal returns to charity overall. But you have made arguments based on the small size of individual donors relative to the large size of the charities they support, and those don’t settle the issue.
I don’t think your treatment of risk for altruists is right. What matters is the correlation of your investment with available philanthropic capital: it’s not necessarily a big deal if you lose 100% of your investment, but it is a big deal if your portfolio underperforms when the market underperforms, because all of the donors are losing money at the same time.
So you are basically making a judgment call about whether other donors to your cause are over- or under-exposed to the market. It’s a fine call to try to make, but you should be aware that that’s what it is.
In the world of rational donors, big charities, and CAPM, the result is that the risk-adjusted returns to the risky asset and the risk-free asset become equal for altruists, regardless of their portfolio composition. Then other idiosyncratic considerations kick in, and you end up with widely varying individual allocations. But the overall allocation is just the same as if there were one giant philanthropist.
Thanks, Paul!
Doesn’t it depend how much the charity is risk-averse? If the charity’s value as a function of wealth were completely linear (which isn’t true in practice), then these correlations wouldn’t matter, only expected income.
I don’t understand your last paragraph. Feel free to clarify if it’s worth the trouble. :)
Yes, it depends on whether there are diminishing marginal returns to charity overall. But you have made arguments based on the small size of individual donors relative to the large size of the charities they support, and those don’t settle the issue.