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
Effective altruists should be applauded for trying to bring evidence and reason to a subject that is plagued by far-mode thinking. But taking their ideas seriously quickly leads to a much more radical approach.
= 27d567bc2d48d9f40e9ccc20ea370b15)
= b715d02e85f7b3b4ae65ca3d3e450868)
Subscribe to RSS Feed
= f037147d6e6c911a85753b9abdedda8d){kind=logo}
Yes, we have to be quite careful here.
Let's take penny stocks. First, there is no exception for them in the EMH so if it holds, the penny stocks, like any other security, must not provide a "free" opportunity to make money.
Second, when you say they are "a poor investment in terms of expected return", do you actually mean expected return? Because it's a single number which has nothing do with risk. A lottery can perfectly well have a positive expected return even if your chance of getting a positive return is very small. The distribution of penny stock returns can be very skewed and heavy-tailed, but EMH does not demand anything of the returns distributions.
So I think you have to pick one of two: either penny stocks provide negative expected return (remember, in our setup the risk-free rate is zero), but then EMH breaks; or the penny stocks provide non-negative expected return (though with an unusual risk profile) in which case EMH holds but you can't consistently lose money.
My "risk-adjusted terms" were a bit of a handwave over a large patch of quicksand :-/ I mostly meant things like leverage, but you are right in that there is sufficient leeway to stretch it in many directions. Let me try to firm it up: let's say the portfolio which you will use to consistently lose money must have fixed volatility, say, equivalent to the volatility of the underlying market.
Yes, I mean expected return. If you hold penny stocks, you can expect to lose money, because the occasional big wins will not make up for the small losses. You are right that we can imagine lotteries with positive expected return, but in the real world lotteries have negative expected return, because the risk-loving are happy to pay for the chance of big winnings.
Why?
Suppose we have two classes of investors, call them gamblers and normals. Gamblers like risk, and are prepared to pay to take it. In particular, they like asymmetric upside risk ("lottery tickets"). Normals dislike risk, and are prepared to pay to avoid it (insurance, hedging, etc). In particular, they dislike asymmetric downside risk ("catastrophes").
There is an equity instrument, X, which has the following payoff structure:
99% chance: payoff of 0 1% chance: payoff of 1000
Clearly, E(X) is 10. However, gamblers like this form of bet, and are prepared to pay for it. Consequently, they are willing to bid up the price of X to (say) 11.
Y is the instrument formed by shorting X. When X is priced at 11, this has the following payoff structure:
99% chance: payoff of 11 1% chance: payoff of -989
Clearly, E(Y) is 1. In other words, you can make money, in expectation, by shorting X. However, there is a lot of downside risk here, and normals do not want to take it on. They would require E(Y) to be 2 (say) in order to take on a bet of that structure.
So, assuming you have a "normal" attitude to risk, you can lose money here (by buying X), but you can't win it in risk-adjusted terms. This is caused by the market segmentation caused by the different risk profiles. Nothing here is contrary to the EMH, although it is contrary to the CAPM.
Thoughts: