I disagree with this for two reasons. Index investing is, as you say, motivated by two things: risk aversion and market efficiency. But neither of those applies to donating to charity.
Risk aversion – For your personal expenditures, your millionth dollar is worth far less than your thousandth dollar. But that’s not true for charity because you can keep finding more ways to do good. As this 80k article put it: “What would I do with a tenth Ferrari?” But, “What am I going to do with my tenth vaccine? Vaccinate another kid!”
Market efficiency – There are a lot of people working really hard to make money in the stock market. It’s hard to do better than they are. The same is not true for charity. As a basic example, money donated to third world countries is ~10x more cost-effective on average than money donated to wealthy countries, but developing-country charities receive a lot less funding.
I think one could argue that creating an index across causes makes sense, because it allows for exposure on things that are hard to compare (eg, we are not perfect utilitarians). I think in practical terms, it would help EAs have some reference and an easy way to donate across causes. For example, one could create a fund that is indexed to the elicited preferences of the EA community, or to some group of experts. The closest I am aware of is what Giving What We Can do.
Here’s how the above “risk aversion” would translate to charity: the risk is not financial loss, but donating to a charity that uses that donation in an inefficient way. So risk aversion in the above described context is not avoiding financial loss, but avoiding utility loss.
The problem with mutual funds in the for-profit domain is that those mostly underperform index funds. General market indexes select the N best-performing companies—like 500 out of tens of thousands. This would translate to charity as selecting the N best-performing” charities, measured in something like “delivered utility per dollar”. So let’s select the 500 most cost-efficient charities, out of tens of thousands.
The selection process is still the hand-picking part, and that’s an unavoidable part of donating, as we need to find out which charities are cost-efficient (we don’t have the market efficiency clue as you pointed out). What I’m arguing for is then to have a broad selection of the hand-picked ones, and to construct a weighting among them, based on their properties. There exists an optimal distribution of donations, and we’re very unlikely to find it by hand-picking alone. The for-profit market analogy shows that using the right statistical methods for finding the distribution (among the selected) is very likely superior, and the broader the sample (again, among the selected), the better the results will be.
I disagree with this for two reasons. Index investing is, as you say, motivated by two things: risk aversion and market efficiency. But neither of those applies to donating to charity.
Risk aversion – For your personal expenditures, your millionth dollar is worth far less than your thousandth dollar. But that’s not true for charity because you can keep finding more ways to do good. As this 80k article put it: “What would I do with a tenth Ferrari?” But, “What am I going to do with my tenth vaccine? Vaccinate another kid!”
Market efficiency – There are a lot of people working really hard to make money in the stock market. It’s hard to do better than they are. The same is not true for charity. As a basic example, money donated to third world countries is ~10x more cost-effective on average than money donated to wealthy countries, but developing-country charities receive a lot less funding.
I think one could argue that creating an index across causes makes sense, because it allows for exposure on things that are hard to compare (eg, we are not perfect utilitarians). I think in practical terms, it would help EAs have some reference and an easy way to donate across causes. For example, one could create a fund that is indexed to the elicited preferences of the EA community, or to some group of experts. The closest I am aware of is what Giving What We Can do.
I think that would be more analogous to a mutual fund: you pick and choose the charities that look particularly good. That’s what EA Funds do.
Here’s how the above “risk aversion” would translate to charity: the risk is not financial loss, but donating to a charity that uses that donation in an inefficient way. So risk aversion in the above described context is not avoiding financial loss, but avoiding utility loss.
The problem with mutual funds in the for-profit domain is that those mostly underperform index funds. General market indexes select the N best-performing companies—like 500 out of tens of thousands. This would translate to charity as selecting the N best-performing” charities, measured in something like “delivered utility per dollar”. So let’s select the 500 most cost-efficient charities, out of tens of thousands.
The selection process is still the hand-picking part, and that’s an unavoidable part of donating, as we need to find out which charities are cost-efficient (we don’t have the market efficiency clue as you pointed out). What I’m arguing for is then to have a broad selection of the hand-picked ones, and to construct a weighting among them, based on their properties. There exists an optimal distribution of donations, and we’re very unlikely to find it by hand-picking alone. The for-profit market analogy shows that using the right statistical methods for finding the distribution (among the selected) is very likely superior, and the broader the sample (again, among the selected), the better the results will be.
Mutual funds underperform in an environment where arbitrage exists and prices are at least close to efficient.
Indices don’t select the “best performing” companies, they usually select the “biggest” companies. Here the analogy to the charity world breaks.