The principle of ‘altruistic arbitrage’
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?
I think the big difference between investors and altruists isn’t about diverse vs concentrated values, but that making money in one time period helps you make money in the next, whereas saving orphans in one time period doesn’t allow you to invest those orphans to help save more next year. We might expect good investors to dominate the stock market until Efficient Market pressures come into play; there is no such positive feedback loop for altruism.
Also, your useage of ‘arbitrage’ is a bit strange. I think of arbitrages as being portfolios with a wealth process W such that
W0 = 0
P[W1 < 0] = 0
P[W1 > 0] > 0
whereas you seem to be thinking of them as “unexploited opportunities”. True, a good opportunity could be turned into an arbitrage as part of the appropriate portfolio, but you’ll probably need to hedge. And yet this is exactly what we do not need to do with utility.
Actually, I’m not sure why you make the reference to Arbitrage. Isn’t your point basically just that consumer surplus can be unusually high for individuals with unusual demand functions because the supply (of chances to do good) is fixed so lower demand ⇒ lower price?
Which suggests that creating a corporation that makes money is one of the best forms of altruism around. You’ve created value for others, and put yourself in a position to create even more value in the future.
I have no evidence for this, but it seems plausible: What if people who are the recipients of altruism are more likely to be providers of altruism in the future? This would mean that altruism really is a form of investment. I would be curious to know if anyone has studied the effects of receiving altruism on future behavior.
Unfortunately, the Ugandan Orphans you saved are unlikely to be joining you at your hedge fund.
I have an issue with your use of the word “arbitrage”. Arbitrage is “risk-free profit at zero cost”. How do you define zero-cost altruism?
To Larks and Shminux—I am twisting the idea of arbitrage, to be more like ‘economic profit’ or ‘being sure to beat the market rate of return on investment/altruism’. Maybe I should stop using the term arbitrage.
“Isn’t your point basically just that consumer surplus can be unusually high for individuals with unusual demand functions because the supply (of chances to do good) is fixed so lower demand ⇒ lower price?”
Yes, though the supply surve just slopes upwards—it isn’t vertical.
I could re-write the principle as ‘when supply curves slope upwards the purchases that offer the highest consumer surplus to you will mostly be things that you value but others don’t.’ On financial markets that isn’t so important as most investors have very similar values, but in other areas it matters more.
I like your point about feedback loops in finance, but shouldn’t proven effective philanthropists attract more donations if people cared about efficacy?
Yes—but I think the two provisos you mention are very important. Proving will be more difficult (measuring profit is easy; measuring Delta(QALY) is hard), and fewer people do care about efficiency.