Raison d'être

My original reason for risking my money for more, and the reason I tell myself, is that the marginal value of losing just about any amount of my money at the moment is negligible. I am fairly austere in my consumption habits and have no big ticket debt. Though, having lots and lots of money would certainly improve my options in life.

History

I am a bad gambler, better and investor. I lost thousands using the Martingale betting strategy which seemed to work on short-time line simulations that I tried, but failed to work in real life. I now understand why it doesn't work fortunately. I lost thousands on poker, which I’m awful at. Now, I’ve lost thousands on speculating in stocks.

Insight

I understand why I lost money when I gambled. It’s less clear to me now as a speculator. My consistent failure has resigned me to avoid any active management of my money making by investing for the foreseeable future because maybe I'm just a gambler and rationalizing all my irrationality in finance away. I was hoping someone here could help me understand what’s going on?

Strategy

My current stock portfolio is down 6000 dollars. My prior is that I have just been the liquidity in the market. My basic strategy has been buying mainstream stocks whose price has tanked for one reason or another (in the hope of a turnaround, or capitalising on people’s fear causing them to dump the stock below its actual value. And, to buy a few biotech stocks that seem high potential. This is all on the ASX cause it’s a hassle to open accounts to trade internationally:

Performance: underpriced

* BHP Billiton crashed due to low oil and an environmental disaster in brazil

* Slater and Gordan crashed due to getting class action law-suited by its own investors (ironic, since slater and gordan specialises in just that) through its main competitor

* Woolworths crashed due to price war with competitor and weaker profits

Growth: High potential, tractable and neglected

* Bionics limited is putting through some psychiatric medications in trials and I thought it would almost be good philanthropy to sponsor it since it’s quite novel compared to existing treatments

* Integral diagnostics is mainly owned by doctors who own clinics that order the machines so I feel like it’s undervalued by people not connected to it

* Regis healthcare gives me cheap exposure to the aging population market

* Tissue Therapies sounded like it was about a wound healing thing from a superhero comic but turned out to just be some niche diabetic product

* Donfang modern agriculture grows mandarins or oranges in China, and I wanted exposure to China and thought it was interesting that they’re listed on the Australian stock exchange

Portfolio optimization

Outcomes

I’ve either made a significant loss on each of these, over the course of a month, or basically no change in the price. The exception is tissue therapies that I bought ages ago and lost lots on too. I was going for long term appreciation anyway, so maybe things are okay? Help me become stronger! The first stock I picked I did extensive quantitative research on the fundamentals. However, I couldn't integrate all the information I collated into a single indicator for what decision I should make and I still don't know what that would look like so I just had to go with my gut. I made a loss anyway despite having found evidence that the team involved were actually quite pathetic because I already did all the research and thought it sad if I didn’t participate (plus shorting seemed to complicating!). I know technical analysis is bullshit, and I don’t see how any inefficiencies in machine learning of stock data that I could replicate in a timely manner with my average brain haven’t already been taken advantage of by existing quants.

Epistemic status: 90% confident.

Inspiration: Arjun Narayan, Tyler Cowen.

The noblest charity is to prevent a man from accepting charity, and the best alms are to show and enable a man to dispense with alms.

Moses Maimonides.

Background

Effective Altruism (EA) is "a philosophy and social movement that applies evidence and reason to determine the most effective ways to improve the world." Along with the related organisation GiveWell, it often focuses on getting the most "bang for your buck" in charitable donations. Unfortunately, despite their stated aims, their actual charitable recommendations are generally wasteful, such as cash transfers to poor Africans. This leads to the obvious question - how can we do better?

Doing better

One of the positive aspects of EA theory is its attempt to widen the scope of altruism beyond the traditional. For instance, to take into account catastrophic risks, and the far future. However, altruism often produces a far-mode bias where intentions matter above results. This can be a particular problem for EA - for example, it is very hard to get evidence about how we are affecting the far future. An effective method needs to rely on a tight feedback loop between action and results, so that continual updates are possible. At the extreme, Far Mode operates in a manner where no updating on results takes place at all. However, it is also important that those results are of significant magnitude as to justify the effort. EA has mostly fallen into the latter trap - achieving measurable results, but which are of no greater consequence.

The population of sub-Saharan Africa is around 950 million people, and growing. They have been a prime target of aid for generations, but it remains the poorest region of the world. Providing cash transfers to them mostly merely raises consumption, rather than substantially raising productivity. A truly altruistic program would enable the people in these countries to generate their own wealth so that they no longer needed poverty - unconditional transfers, by contrast, is an idea so lazy even Bob Geldof could stumble on it. The only novel thing about the GiveWell program is that the transfers are in cash.

Unfortunately, no-one knows how to turn poor African countries into productive Western ones, short of colonization. The problem is emphatically not a shortage of capital, but rather low productivity, and the absence of effective institutions in which that capital can be deployed. Sadly, these conditions and institutions cannot simply be transplanted into those countries.

A greater charity

However, there do exist countries with high productivity, and effective institutions in which that capital can be deployed. That capital then raises world productivity. As F.A. Harper wrote:

Savings invested in privately owned economic tools of production amount to... the greatest economic charity of all.

That is because those tools increase the productivity of labour, and so raise output. The pie has grown. Moreover, the person who invests their portion of the pie into new capital is particularly altruistic, both because they are not taking a share themselves, and because they are making a particularly large contribution to future pies.

In the same way that using steel to build tanks means (on the margin) fewer cars and vice-versa, using craftsmen to build a new home means (on the margin) fewer factories and vice-versa. Investment in capital is foregone consumption. Moreover, you do not need to personally build those economic tools; rather, you can part-finance a range of those tools by investing in the stock market, or other financial mechanisms.

Now, it's true that little of that capital will be deployed in sub-Saharan Africa at present, due to the institutional problems already mentioned. Investing in these countries will likely lead to your capital being stolen or becoming unproductive - the same trap that prevents locals from advancing equally prevents foreign investors from doing so. However, if sub-Saharan Africa ever does fix its culture and institutions, then the availability of that capital will then serve to rapidly raise productivity and then living standards, much as is taking place in China. Moreover, by making the rest of the world richer, this increases the level of aid other countries could provide to sub-Saharan Africa in future, should this ever be judged desirable. It also serves to improve the emigration prospects of individuals within these countries.

Feedback

Another great benefit of capital investment is the sharp feedback mechanism. The market economy in general, and financial markets in particular, serve to redistribute capital from ineffective to effective ventures, and from ineffective to effective investors. As a result, it is no longer necessary to make direct (and expensive) measurements of standards of living in sub-Saharan Africa; as long as your investment fund is gaining in value, you can rest safe in the knowledge that its growth is contributing, in a small way, to future prosperity.

Commitment mechanisms

However, if investment in capital is foregone consumption, then consumption is foregone investment. If I invest in the stock market today (altruistic), then in ten years' time spend my profits on a bigger house (selfish), then some of the good is undone. So the true altruist will not merely create capital, he will make sure that capital will never get spent down. One good way of doing that would be to donate to an institution likely to hold onto its capital in perpetuity, and likely to grow that capital over time. Perhaps the best example of such an institution would be a richly-endowed private university, such as Harvard, which has existed for almost 400 years and is said to have an endowment of $32 billion.

John Paulson recently gave Harvard $400 million. Unfortunately, this meant he came in for a torrent of criticism from people claiming he should have given the money to poor Africans, etc. I hope to see Effective Altruists defending him, as he has clearly followed through on their concepts in the finest way.

Further thoughts and alternatives

• Some people say that we are currently going through a "savings glut" in which capital is less productive than previously thought. In this case, it may be that Effective Altruists should focus on funding (and becoming!) successful entrepreneurs in different spaces.
• I am sympathetic to the Thielian critique that innovation is being steadily stifled by hostile forces. I view the past 50 years, and the foreseeable future, as a race between technology and regulation, which technology is by no means certain to win. It may be that Effective Altruists should focus on political activity, to defend and expand economic liberty where it exists - this is currently the focus of my altruism.
• However, government is not the enemy; rather, the enemy is the cultural beliefs and conditions that create a demand for the destruction of economic liberty. To the extent this critique, it may be that Effective Altruists should focus on promoting a pro-innovation and pro-liberty mindset; for example, through movies and novels.

Conclusion

I sure think it is!  But I could be wrong...

This is my first article/post? here and to be honest, I have this website open in another tab and I keep refreshing it to see if I still have enough points to post.  I wish I would have taken a screenshot every time my karma changed.  First it was 0, then it was -1, then it was back to 0, then I think it jumped up to 5.  I thought I was safe but then this morning it was down to 0.  So if this post seems "linky" then it might be because I'm trying to share as much information as I can while my window of opportunity is still open.  

Pragmatarianism (tax choice) is the belief that taxpayers should be able to choose where their taxes go.  Tax choice is the broad concept while pragmatarianism is my own personal spin on it... but sometimes I use "tax choice" when I mean pragmatarianism.  Eh, at this point I don't think it's a big deal.  Really the only thing nice about the word "pragmatarianism" is that it functions as a unique ID... which is extremely helpful when it comes to searches.  Don't have to worry about wading through irrelevant results. 

Here are some links from my blog which should help you decide whether pragmatarianism is more or less wrong...

Pragmatarianism FAQ - a good place to start.  It's pretty short.  

Key concepts - a work in progress.  Some of the concepts are linked to entries which have PDF files with a bunch of relevant quotes and passages.  If you like any of them then please share them in this thread... Quotes Repository.  I shared a few but they didn't fare so well... so I'm guessing that most people here aren't fans of economics... or they aren't fans of my economics. 

Progress as a Function of Freedom - hedging bets, the impossibility of hostile aliens, the problem with "rights".  

What Do Coywolves, Mr. Nobody, Plants And Fungi All Have In Common? - the universal drive to choose the most valuable option, the carrying model as an explanation for our intelligence, a bit on rationality.

Builderism - where better options come from, globalization, debunking Piketty, eliminating poverty. 

My Robin Hanson trilogy...

Is Robin Hanson's Path To Efficient Voting Pragmatic Or Brilliant Or Both? - maybe we should have a civic currency?

Rescuing Robin Hanson From Unmet Demand - how many other people are in the same boat?

Futarchy vs Pragmatarianism - is it logically inconsistent to support one but not the other?  

/trilogy.

AI Box Experiment vs Xero's Rule - my first brainstorm attempt to wrap my mind around the idea of an AI box.

Is A Procreation License Consistent With Libertarianism? - would a procreation license be less wrong?

Why I Love Your Freedom - my critique of the best critique of libertarianism.  A bit on rationality.

So what do you think?  Am I in the right place?  

What else?  Of course I'm an atheist!  And I love sci-fi... and for sure I want to live forever.  The major obstacle is that too many people fail to grasp that progress depends on difference.  I do my best to try and eliminate this obstacle.  Unfortunately I suck at writing and my drawings are even worse.  Oh well.

Let me know if you have any questions.

The finance professor John Cochrane recently posted an interesting blog post. The piece is about existential risk in the context of global warming, but it is really a discussion of existential risk generally; many of his points are highly relevant to AI risk.

If we [respond strongly to all low-probability threats], we spend 10 times GDP.

It's a interesting case of framing bias. If you worry only about climate, it seems sensible to pay a pretty stiff price to avoid a small uncertain catastrophe. But if you worry about small uncertain catastrophes, you spend all you have and more, and it's not clear that climate is the highest on the list...

All in all, I'm not convinced our political system is ready to do a very good job of prioritizing outsize expenditures on small ambiguous-probability events.

He also points out that the threat from global warming has a negative beta - i.e. higher future growth rates are likely to be associated with greater risk of global warming, but also the richer our descendants will be. This means both that they will be more able to cope with the threat, and that the damage is less important from a utilitarian point of view. Attempting to stop global warming therefore has positive beta, and therefore requires higher rates of return than simple time-discounting.

It strikes me that this argument applies equally to AI risk, as fruitful artificial intelligence research is likely to be associated with higher economic growth. Moreover:

The economic case for cutting carbon emissions now is that by paying a bit now, we will make our descendants better off in 100 years.

Once stated this way, carbon taxes are just an investment. But is investing in carbon reduction the most profitable way to transfer wealth to our descendants? Instead of spending say $1 trillion in carbon abatement costs, why don't we invest $1 trillion in stocks? If the 100 year rate of return on stocks is higher than the 100 year rate of return on carbon abatement -- likely -- they come out better off. With a gazillion dollars or so, they can rebuild Manhattan on higher ground. They can afford whatever carbon capture or geoengineering technology crops up to clean up our messes.

So should we close down MIRI and invest the funds in an index tracker?

The full post can be found here.

First off, note that I am not in possession of any of the licenses that entitle me to call myself a financial advisor. However, the approach to investing I will present in this article is endorsed by many economists, Warren Buffet, and Vanguard. I personally follow it, and you can too.

What is the goal of investing? To turn money today into money tomorrow. There are several ways to do this, and people on Wall Street are constantly inventing new ones. What is more, you have professional competition in this activity: people who want to make money today into more money tomorrow then is otherwise possible. You are producing a commodity, and the better you understand this, the better investing decisions you will make.

What are the ways to make money today into money tomorrow? There are many ways. But we want to make money today into money tomorrow in the most efficient way that involves the least amount of worry.  After all, we have specialised in some other area of human activity, and are not good at this area. So we should pick an investment that requires no upkeep, no worry, and good returns. This rules out real estate entirely, and the last criterion rules out letting money sit there.

So how does money today turn into money tomorrow? First you pay taxes on the money today, then give the money today as a loan (called "buying a bond")  to someone who needs it to do something that will be profitable. Or you can purchase a bit of an enterprise that makes money (called "buying stock") and let it make money, and pay you in the form of dividends or appreciation of shares, as the company grows. Then you sell what you have or get payed back and get taxed again.

But what if they don't pay me back or the company fails? Then you are screwed.

So what if I put a little bit of money in each loan and each share? Then the failure of each one won't hurt you that much.

Okay, I'll do that! Got a few million lying around?

Nope. So I can't do that? Nope, you can't. Bonds come in units of $1000 face value, and stocks in lots of 100.

Wait, what if I got a bunch of my friends together, and we pooled our money? That's called a mutual fund, and you can buy them. But the person who manages the fund charges you money, and that comes right out of the money tomorrow, and sometimes out of the money you put in.

So I should try to minimize these charges? Exactly!

Someone promises me higher returns for his fees! He's lying: academic research has shown no evidence of after-fee returns beating the market in general. After all, wouldn't you keep this secret for yourself if it really worked? He gets paid the same even if you lose all your money.

So what is the fund with the lowest fees? Well, the Vanguard Admiral Shares S&P 500 has fees of 0.05% of your money. Check out the prospectuses before you invest: they list out all the things that can go wrong.

But I don't like the risk! Remember bonds? You are more likely to get paid back, but the price is lower returns.

But I want diversification! So buy a bond mutual fund as well. And as usual there are fees you want to avoid.

Do I need anything else? According to CAPM, no. (We can talk about international stocks, but the S&P 500 do business worldwide, and there are lots of details about the costs of diversification etc.)

But how much do I put in each? That's a research question. But there is plenty of advice on this one question, and it doesn't cost you anything.

What about taxes? That's between you and the IRS. But sign up for a 401(k), maximize it, put as much into an IRA as you can, consider carefully the Roth IRA, think about which bonds you want to hold, and don't trade!

Don't trade? Don't trade: remember, you have competition. Trading hurts retail investors: it is expensive and they aren't good at it.

But I have a really good idea! Then work on Wall Street and risk someone else's money. Best part: you get paid either way.

But I want to change which mutual fund I hold to one that got more returns! Don't do it: the high returns don't last. Reversion to the mean is a powerful force.

I want to move to bonds as I get older! Still don't do it: you get taxed on the realized gains. It's easier to buy new then to sell old.

So what should I do? Think of your portfolio as one thing, and think about how to minimize taxes and fees as you go from where you are now to where you want to be. Then do it. But think first! Buying doesn't destroy the basis the way selling does, and overbalancing in tax-deferred accounts cancels out imbalanced non tax-deferred accounts.

------

Sources: http://www.vanguard.com/bogle_site/sp20051015.htm, 

http://online.wsj.com/article/SB10001424053111904583204576544681577401622.html

Buffet endorsing the index fund http://www.berkshirehathaway.com/letters/1996.html

http://johncbogle.com/wordpress/wp-content/uploads/2011/09/The-Professor-The-Student-and-the-Index-Fund-9-4-11.pdf

Similar sources exist everywhere. Ask your local economics professor what his investments are, and I will be willing to bet 10:1 odds that they are majority placed in an index fund.

The past few days have seen an increase of chatter concerning retirement and financial planning. One of us is even putting out a prospectus for a rational financial planning sequence. Some others have derided the concept of saving for retirement, as there is a probability of death before that time.

I am of the Extreme Early Retirement group. The idea is to save and invest 60-90% of your income, and you will have enough money to retire within a decade rather than four decades of the normal working career. This requires you to exercise your frugality muscle (such as cutting cable, biking to work, eating out less), but due to hedonistic adaptation, you will come out no less unhappy.

The sequences have already spoken on how spending money does not make us happier (after our basic needs are met). A Rational Financial plan should take this into account, even if a majority of people would not want to consider it.

I am just a beginner, so I linked the two big names in EEA, Mr. Money Mustache and Early Retirement Extreme. You can find their journeys towards financial independence here and here.

ERE is an austerity heavyweight, while MMM lives a pretty luxurious lifestyle, but still spends much less than his former coworkers. He just spends on what is important to him, such as travelling with his family and eating organic food, and not on anything frivolous, such as cable or eating out. He lives very far from a deprived lifestyle which the average person would shy away from. It takes a paradigm shift and some grit, but the people of LessWrong are not the type to reject munchkin ideas because it takes a little bit of mental effort.

If I were to make a compilation of posts for a Rational Financial Planning sequence, it will go as such…

How Little Money you need to Retire ?
Basic Retirement Math
Rationalist Spending 
Maximizing Utilons per Dollar
Utilons Free Of Charge
Investing Rationally Basics

These are just the basics. Investment advice is scare, and the above does not talk about many fianacial aspects, such as insurance, children, career choice. The authors do speak about them on their blog’s, but I omitted them for brevity. Read and follow these posts however, and you will be better off than 90% of your peers, and well on the road to Extreme Early Retirement.

[Edit] This idea of cutting your expenses and maximizing your savings obviously do not apply only to early retirement. Other financial goals, such as saving for a house, building up capital for a business, or giving more money to charity all will be more quickly accomplished if you learn to cut excesses from your life. The driving idea is the cost to live is very small, you are not made any happier by spending money on the extras, and you should put this money where it matters to you the most.

Petruchio

Topic: I will be in debt for several years, but will eventually have a disposable income. Should I donate now or later?

Here's my situation: I am a student, with student loans and no income. I can take out more loans than I need. Grad PLUS loans have a fixed interest rate of 7.9% - higher than, say, a mortgage rate, or expected stock returns. Some day, I will have those loans paid off, and will have money that I intend to give to charity.

My objectives: to live on less than my means, and give a significant fraction of my income to charity.

Question: When, if ever, should I give to charity before paying off those loans?

My initial reaction is to keep a record of how much I feel like I should be giving now, then give it later, adjusted for interest (at some rate equal to or less than 7.9%) - this would result in a bigger donation, but the same impact on my finances.

The only times I think I should give now, and not later:
1)If I don't believe I will make good on my commitment later on. (I'll presumably have a family and bills, etc, and while I am perfectly happy to live on little myself, I know I will want my kids to have nice things. This is somewhat illogical, but I'm imperfect.)
2)If the most worthwhile charity I find see has a higher interest rate than 7.9%.
3)If I find an opportunity to use my money charitably in which I can do more good than others, or where no one else can or will donate. (Mainly, random acts of kindness to strangers or friends - or, someone is matching my donation)

I doubt I will ever see 2) happen (or if it does, I should raise awareness)
3) doesn't happen very often, but when it does I think it is an acceptable use of funds
1) is the main scenario that concerns me. I've heard that "giving charitably is a habit" (that's why my parents had me tithe as a kid). I think that's true, though I haven't read any research on that. Either way, though, as I have no meaningful income (and my loan "allowance" is way more than I care to borrow), how much should I donate to help form the habit?

What do you think? Also, are there any other reasons to donate sooner and not later?

Edit: Givewell has an article on giving now vs later. Not all of it is relevant to my situation, but one point:
>"Economic growth, increased giving, and smarter giving may mean that giving opportunities are worse in the far future."

EDIT: Based on criticism below, I am reconsidering how to proceed with this idea (or something in the neighbourhood).

A topic that has been on my mind recently is where, in our complicated lives, there might be low-hanging fruit ready to be picked by a motivated rationalist. Actual, practical, dollars-and-cents fruit.

In possibly-related news, here is how the writer of About.com's beginner's guide to investing describes the stock market:

Imagine you are partners in a private business with a man named Mr. Market. Each day, he comes to your office or home and offers to buy your interest in the company or sell you his [the choice is yours]. The catch is, Mr. Market is an emotional wreck. At times, he suffers from excessive highs and at others, suicidal lows. When he is on one of his manic highs, his offering price for the business is high as well, because everything in his world at the time is cheery. His outlook for the company is wonderful, so he is only willing to sell you his stake in the company at a premium. At other times, his mood goes south and all he sees is a dismal future for the company. In fact, he is so concerned, he is willing to sell you his part of the company for far less than it is worth. All the while, the underlying value of the company may not have changed - just Mr. Market's mood.

I have heard this narrative many times before, and I'd like to test whether it is accurate - and in particular, whether LWers can consistently beat the market.

The skeptic may well ask: why should LWers have an advantage? Why not go to the professionals - investment advisors? Also, isn't there a whole chapter in Kahneman about how even smart people suck at picking stocks? And what do you, simplicio, know about this anyway?

LWers may have an advantage by virtue of being educated about such topics as cognitive biases, sunk cost fallacy, probabilistic prediction, and expected utility - topics with which investment advisors et al. may or may not be familiar on a gut level. I am not sure if we're any better, but I'd like to test it. Also, if LW turns out to be any good at offering such advice, that advice would presumably be free, unlike that of yon advisor (fees tend to kill returns on investment - just ask anybody who uses Intrade). As for what I personally know - not very much yet. But I find competition very stimulating.

Accordingly, my proposal is for a contest: over the course of 2013, I will set up & maintain a Google Drive spreadsheet. This spreadsheet will be shared with contest participants. Each participant will have say $5,000 of play money to use "buying" (or "selling") stocks on the exchange of their choice. Contestants will record the date of purchase or sale, quantity, and preferably provide comments regarding why they are buying or selling.

At the end of this contest (Dec 31, 2013?), I will commit to Paypal the winner (defined as the person with the highest market valuation of play assets as of midnight on that date) the equivalent of $50 CAD in their local currency. In the unlikely event that I win, I will donate that $50 to the Against Malaria Foundation. (Above commitment does not take effect until I actually gauge interest in this contest, figure out an end date & rules etc., and decide to proceed. If anyone else wants to throw money in the pot, please do.)

The purposes of this post are therefore:

• to find out who is interested - please leave a comment below, and e-mail me at ispollock [at] gmail.com if you want in;
• to solicit constructive and destructive criticism of the project, especially from any local experienced investors (in particular, perhaps a one-year timeframe is too short for a meaningful contest? Also, real-world experience of transaction costs in buying and selling would be extremely helpful);
• to ask if anyone knows of a better software platform for the contest than Google Drive, or knows of any extremely helpful resources I should be reading/linking to.

Cross-posted from http://www.robertwiblin.com

There is a principle in finance that obvious and guaranteed ways to make a lot of money, so called ‘arbitrages’, should not exist. It has a simple rationale. If market prices made it possible to trade assets around and in the process make a guaranteed profit, people would do it, in so doing shifting some prices up and others down. They would only stop making these trades once the prices had adjusted and the opportunity to make money had disappeared. While opportunities to make ‘free money’ appear all the time, they are quickly noticed and the behaviour of traders eliminates them. The logic of selfishness and competition mean the only remaining ways to make big money should involve risk taking, luck and hard work. This is the ’no arbitrage‘ principle.

Should a similar principle exist for selfless as well as selfish finance? When a guaranteed opportunity to do a lot of good for the world appears, philanthropists should notice and pounce on it, and only stop shifting resources into that activity once the opportunity has been exhausted. This wouldn’t work as quickly as the elimination of arbitrage on financial markets of course. Rather it would look more like entrepreneurs searching for and exploiting opportunities to open new and profitable businesses. Still, in general competition to do good should make it challenging for an altruistic start-up or budding young philanthropist to beat existing charities at their own game.

There is a very important difference though. Most investors are looking to make money and so for them a dollar is a dollar, whatever business activity it comes from. Competition between investors makes opportunities to get those dollars hard to find. The same is not true of altruists, who have very diverse preferences about who is most deserving of help and how we should help them; a ‘util’ from one charitable activity is not the same as a ‘util’ from another. This suggests that unlike in finance, we may able to find ‘altruistic arbitrages’, that is to say ‘opportunities to do a lot of good for the world that others have left unexploited.’

The rule is simple: target groups you care about that other people mostly don’t, and take advantage of strategies other people are biased against using.  That rule is the root of a lot of advice offered to thoughtful givers and consequentialist-oriented folks. An obvious example is that you shouldn’t look to help poor people in rich countries. There are already a lot of government and private dollars chasing opportunities to assist them, so the low hanging fruit has all been used up and then some. The better value opportunities are going to be in poor, unromantic places you have never heard of, where fewer competing philanthropist dollars are directed. Similarly, you should think about taking high risk-high return strategies. Most do-gooders are searching for guaranteed and respectable opportunities to do a bit of good, rather than peculiar long-shot opportunities to do a lot of good. If you only care about the ‘expected‘ return to your charity, then you can do more by taking advantage of the quirky, improbable bets neglected by others.

Who do I personally care about more than others? For me the main candidates are animals, especially wild ones, and people who don’t yet exist and may never exist – interest groups that go largely ignored by the majority of humanity. What are the risky strategies I can employ to help these groups? Working on future technologies most people think are farcical naturally jumps to mind but I’m sure there are others and would love to hear them.

This principle is the main reason I am skeptical of mainstream political activism as a way to improve the world. If you are part of a significant worldwide movement, it’s unlikely that you’re working in a neglected area and exploiting how your altruistic preferences are distinct from those of others.

What other conclusions can we draw thinking about philanthropy in this way?

The most widely appreciated finance theory is the Capital Asset Pricing Model. It basically says that diminishing marginal utility of absolute wealth implies that riskier financial assets should have higher expected returns than less risky assets and that only risk correlated with the market (beta risk) is a whole is important because other risk can be diversified out.

Eric Falkenstein argues that the evidence does not support this theory; that the riskiness of assets (by any reasonable definition) is not positively correlated with return (some caveats apply). He has a paper (long but many parts are skimmable; not peer reviewed; also on SSRN) as well as a book on the topic. I recommend reading parts of the paper.

The gist of his competing theory is that people care mostly about relative gains rather than absolute gains. This implies that riskier financial assets will not have higher expected returns than less risky assets. People will not require a higher return to hold assets with higher undiversifiable variance because everyone is exposed to the same variance and people only care about their relative wealth.

Falkenstein has a substantial quantity of evidence to back up his claim. I am not sure if his competing theory is correct, but I find the evidence against the standard theory quite convincing.

If risk is not correlated with returns, then anyone who is mostly concerned with absolute wealth can profit from this by choosing a low beta risk portfolio.

This topic seems more appropriate for the discussion section, but I am not completely sure, so if people think it belongs in the main area, let me know.

Added some (hopefully) clarifying material:

All this assumes that you eliminate idiosyncratic risk through diversification. Technically impossible, but you can get it reasonably low. The R's are all *instantaneous* returns; though since these are linear models they apply to geometrically accumulated returns as well. The idea that E(R_asset) are independent of past returns is a background assumption for both models and most of finance.

Beta_portfolio = Cov(R_portfolio, R_market)/variance(R_market)

In CAPM your expected and variance are:

E(R_portfolio) = R_rfree + Beta_portfolio * (E(R_market) - R_rfree)
Var(R_portfolio) = Beta_portfolio * Var(R_market)

in Falkenstein's model your expected return are:

E(R_portfolio) = R_market       # you could also say = R_rfree; the point is that its a constant
Var(R_portfolio) = Beta_portfolio * Var(R_market)

The major caveat being that it doesn't apply very close to Beta_portfolio = 0; Falkenstein attributes this to liquidity benefits. And it doesn't apply to very high Beta_portfolio; he attributes this to "buying hope". See the paper for more.

Falkenstein argues that his model fits the facts more closely than CAPM. Assuming Falkenstein's model describes reality, if your utility declines with rising Var(R_portfolio) (the standard assumption), then you'll want to hold a portfolio with a beta of zero; or taking into account the caveats, a low Beta_portfolio. If your utility is declining with Var(R_portfolio - R_market), then you'll want to hold the market portfolio. Both of these results are unambiguous since there's no trade off between either measure of risk and return.

Some additional evidence from another source, and discussion: http://falkenblog.blogspot.com/2010/12/frazzini-and-pedersen-simulate-beta.html