High Impact Investment

If you want to support a charity, should you invest the money so that your donation grows in size before it is given? The typical answer is no; helping a charity immediately will usually have a future 'return' in the form of its beneficial impact at least comparable to any pecuniary return on your investment. Perhaps you've decided that investment is worthwhile, however - maybe you're a budding Warren Buffet.

How should you invest your money to maximise your altruistic impact in the future?

Risk Averse Investors

Most people are risk averse. To see this, we need only look at insurance, an example of people paying money to reduce the risk of extremely bad outcomes. If somebody insures their house against fire, they will pay more money on average than they will receive on average in insurance if their house is burnt down. Insurance companies are after profits; if they are paying out (to recompense those whose houses are burnt down) more than they are taking in (from everybody insuring against fire) then they will stop offering fire insurance. Assuming that insurance is a zero sum game, this means that people taking out fire insurance cannot be making money out of it on average.

So on average, fire insurance is not a good bet if all you are interested in is maximising your average bank account balance. However, most people quite reasonably care more about preserving a minimum bank account balance than maximising its average, so they are happy to buy fire insurance. A similar rationale can be applied to investment. Investors pay risk premia to avoid risk. This is why safe assets like gilts have lower returns than more risky assets.

In microeconomic theory, the standard explanation for this is that investors have a diminishing marginal utility of money¹. Whether or not you consider this explanation valid, being more tolerant of risk in your investment will clearly earn you a better return. If you care more about saving more lives on average than you do about guaranteeing that a certain number of lives will be saved, it may be worth taking riskier investments. There are fewer diminishing marginal returns to charitable donations; so long as people are in areas at high risk of malaria, purchasing bed nets at a rate of $5 will be worth doing.


^{1. To illustrate this, imagine somebody who has no money (and no other possessions). We'll call them Max, since that happens to be my name and I've got very little money! There are a lot of things that I want to buy, but can't. I am more eager to buy some things than others, however; a car may seem attractive, but if you gave me £20,000 I would be more likely to spend it on a place to sleep than a car. Simplifying for the purpose of example, imagine that cars and cheap flats both cost £20,000. If I am given £20,000 I will buy a flat, increasing my welfare by a certain amount. If I am given another £20,000 I will buy a car, increasing my welfare again. This second increase must be less than the first because I wanted a flat more than I wanted a car. Therefore the second £20,000 is of less value to me than the first. Therefore there is a diminishing value to each unit of money that I am given. This is the diminishing marginal utility of money.↩}

Radical Moral Ideas: Cost-Effective Charities

This is the first of a series of posts I'm planning to write on moral ideas that would radically change our ethical priorities if we were to accept their premises. Each have a lot of extremely clever people convinced, although they tend to make an unconventional first impression.

How much do you care about other people?

Most people agree that killing is wrong. It doesn't seem to matter much whether this is by killing somebody in front of you with a gun, by deliberately failing to hit the brakes on your car, or by launching an inter-continental ballistic missile at their house. Somewhat more contentious is the division between active and passive killing. Is shooting somebody worse than deliberately failing to hit your brakes or failing to tell them that a particular item of food is lethally contaminated? To some degree, at the very least, all of this seems bad.

How much cost can a person be expected to bear to avoid killing? If your car's brakes are broken, and you must swerve your car into a ditch to avoid hitting a person, are you morally obligated to bear the cost of repairing your car? Peter Singer gives a powerful example that appears to decide the argument: if you must ruin your expensive shoes to rescue a child from a pond, you should surely do so.

If we accept these arguments then we've established that it is right to bear a cost of up to several hundred pounds in order to save the life of someone else. In fact, the most cost-effective charities can save lives for roughly this value¹. It seems imperative, therefore, to give much more money to these most cost effective charities.

A corollary of this is that you should not give money to less effective charities. Charities fighting cancer and helping the disabled have laudable aims, but their operating costs are high. Donations to them save fewer lives than donations to more cost-effective charities, thereby causing more people to die.

<sup>1. The NHS guidelines approve drugs that prolong lives2 at a cost of less than £20,000 annually.↩
2. Actually the relevant criterion is the quality adjusted life-year or QALY.↩</sup>