(I’ll preface by saying that I’m a new to finance, so I could be very wrong.)
I think it’s plausible that an isoelastic utility function in wealth is a poor fit, even for those who are risk-neutral in their altruism (and even completely impartial). I wouldn’t be surprised if our actual utility functions
1. have decreasing marginal returns at low wealth (and maybe even increasing marginal returns at some levels of low wealth),
2. have a roughly constant marginal returns for a while (the same rightmost derivative as in 1), at the rate of the best current donation opportunities, and
3. have decreasing marginal returns again at very high levels of wealth (maybe billions or hundreds of millions, within a few orders of magnitude of Good Ventures’ funds.)
1 is because of personal risk aversion and/or better returns on self-investment than donations compared to 2, where the returns come mainly from donations. 3 is because of eventually marginally decreasing altruistic returns on donations.
I made a graph to illustrate. I think region 2 is probably much larger relative to the other regions, and 1 is probably much smaller than 3. I also think this is missing some temporal effects for 1: you need money every year to survive, not just in the long run, and donation opportunities may be better or worse in the future.
For this reason and psychological reasons, it might be better to compartmentalize your wealth and investments into:
A. Short-term expenses, including costs of living, fun stuff, and maybe some unforeseen expenses (school, medical expenses, unique donation opportunities during times where your investments are doing poorly, to avoid pulling from them). This should be pretty low risk. This is what your chequing account, high-interest savings account, CDs (certificates of deposit, GICs in Canada), and maybe bonds could be for.
B. Retirement.
C. Altruistic investments and donations. Here you can take on considerable risk and use high amounts of leverage, maybe even higher than what you’ve recommended. I would recommend against any risks that could leave you owing a lot of money, even in the short-term, enough to cause you to need to withdraw from A or B. Risk neutral altruists can maximize expected long-run returns here, although discounting long-run returns that go into scenario 3. Because of A and B, we’re past scenario 1, so either in 2 or 3. Your mathematical arguments could approximately apply, with caveats, if most of the expected gains come from staying within 2.
If you plan to buy a house, that might deserve its own category. Your time frame is usually longer than in A but shorter than in B.
(I’ll preface by saying that I’m a new to finance, so I could be very wrong.)
I think it’s plausible that an isoelastic utility function in wealth is a poor fit, even for those who are risk-neutral in their altruism (and even completely impartial). I wouldn’t be surprised if our actual utility functions
1. have decreasing marginal returns at low wealth (and maybe even increasing marginal returns at some levels of low wealth),
2. have a roughly constant marginal returns for a while (the same rightmost derivative as in 1), at the rate of the best current donation opportunities, and
3. have decreasing marginal returns again at very high levels of wealth (maybe billions or hundreds of millions, within a few orders of magnitude of Good Ventures’ funds.)
1 is because of personal risk aversion and/or better returns on self-investment than donations compared to 2, where the returns come mainly from donations. 3 is because of eventually marginally decreasing altruistic returns on donations.
I made a graph to illustrate. I think region 2 is probably much larger relative to the other regions, and 1 is probably much smaller than 3. I also think this is missing some temporal effects for 1: you need money every year to survive, not just in the long run, and donation opportunities may be better or worse in the future.
For this reason and psychological reasons, it might be better to compartmentalize your wealth and investments into:
A. Short-term expenses, including costs of living, fun stuff, and maybe some unforeseen expenses (school, medical expenses, unique donation opportunities during times where your investments are doing poorly, to avoid pulling from them). This should be pretty low risk. This is what your chequing account, high-interest savings account, CDs (certificates of deposit, GICs in Canada), and maybe bonds could be for.
B. Retirement.
C. Altruistic investments and donations. Here you can take on considerable risk and use high amounts of leverage, maybe even higher than what you’ve recommended. I would recommend against any risks that could leave you owing a lot of money, even in the short-term, enough to cause you to need to withdraw from A or B. Risk neutral altruists can maximize expected long-run returns here, although discounting long-run returns that go into scenario 3. Because of A and B, we’re past scenario 1, so either in 2 or 3. Your mathematical arguments could approximately apply, with caveats, if most of the expected gains come from staying within 2.
If you plan to buy a house, that might deserve its own category. Your time frame is usually longer than in A but shorter than in B.