Risk aversion and investment (for altruists)

Suppose I hope to use my money to do good some day, but for now I am investing it and aiming to maximize my returns. I face the question: how much risk should I be willing to bear? Should I pursue safe investments, or riskier investments with higher returns?

My knee-jerk response is to say “An altruist should be risk neutral. If you have twice as much money, you can do twice as much good. Sure, there are some diminishing returns, but my own investment is minuscule compared to an entire world full of philanthropists. So in the regime where I am investing, returns are roughly linear.” (I might revise this picture if I thought that I was a very unusual philanthropist, and that few others would invest in the same charitable causes as me—in that case I alone might represent a significant fraction of charitable investment in my causes of choice, so I should expect to personally run into diminishing returns.)

But on closer inspection there is something fishy about this reasoning. I don’t have great data on the responsiveness of charitable giving to market performance, but at the individual level it seems┬áthat the elasticity of charitable giving to income is about 1—if I am 50% richer (in one possible world than another), I tend to give 50% more to charity.┬áSo in worlds where markets do well, we should expect charities to have more money. If markets (rather, the average investor) do 10% better, I should expect 10% more money to be available for any particular charitable cause, regardless of how many donors it has. Read the rest of this entry »