If More Now, Less Later

On Thursday I talked, together with Elie Hassenfeld of GiveWell, at the UC Berkeley Faculty Club on Effective Altruism (audio here). Scott Alexander wrote a thoughtful report, which Tyler blogged. One claim I made that I’ve before (here, here, here) is that because real interest rates (i.e., average investment rates of return) tend to be positive, it is more effective to wait, investing now and then donating later. Since many continue to question that claim, I thought I’d elaborate a bit.

In the past I’ve used Ben Franklin as an example of the possibility of using trusts to save for a very long time. But I think that distracted from my basic point, which can be made just by suggesting that you wait until the end of your life to donate. Waiting longer might in fact be better, but it has more tax and agency issues; you can’t as easily ensure your money is spent the way you want.

I admit that a good reason to donate now is if you believe that we are quickly running out of worthy recipients of charity, either because the world is getting richer and nicer, the charity world is getting more effective, or we happen to live in an unusual time of great need or danger. People who think that global warming and ecological collapse will soon make the world a hell can’t believe this, nor can those who fear great disruption in an em transition. But others may.

I also agree that tax considerations will change the rate of return you can expect, and that by giving over a period of time you may learn from your early gifts to better pick later gifts. But it should be enough to start this learning process when you are older; your life experience will help you learn faster then.

The issue I want to focus on in this post is: how high do interest rates have to be to justify saving to donate later? I’ve sometimes said that interest rates need to be higher than growth rates, and some have questioned if interest rates are in fact higher than growth rates. Others, like my co-speaker Ellie Hassenfeld and his college Holden Karnofsky at Givewell, argue that giving now to help people who are sick or under-schooled creates future benefits that grow faster than ordinary growth rates. But now I think I was mistaken – if real charity needs are just as strong in the future as today, then all we really need are positive interest rates. Let me explain.

When a person chooses to save financially, they choose to spend a bit less in their usual ways, in order to give money to someone else, in the expectation of getting money back from that someone else at a later date. If they had instead not saved, and spent the money instead, that spending may well have also indirectly benefited them in the future. They might buy some medicine, get more exercise, get more sleep, try out some new products, make some new friends, or learn some new skills, any of which might help their future self.

But at the margin, a person who saves another dollar, or chooses not to borrow another dollar, must typically expect the financial returns from their investments will help them more in the future than will such indirect effects of spending today. In fact, they should expect this savings will benefit their future self more than any of these other ways of spending today. After all, why give up money today if that both gives you less to spend today, and gives you less in the future? So there wouldn’t be any savings, or less than maximal borrowing, if people didn’t expect more gains later from saving than from spending today.

This implies that unless charity recipients are saving nothing and borrowing as much as they possibly can, they must expect that you would benefit them more in the future by saving and giving them the returns of your savings later, than if you had given them the money today, even after taking into account all of the ways in which their spending today might help them in the future. So there really must be a tradeoff between helping today and helping later; if you help more today, you help less in the future. At least if you help them in a way they could have helped themselves, if only they had the money.

Of course you might not care as much about future suffering, or future folks might suffer less. But if you do care as much, and there is as much future need to help, then if interest rates are positive you can obtain more real resources with which to give more real help if you will save now, and donate later.

You might wonder: what if a deserving charity recipient is borrowing, and at a higher interest rate than you can get from by investing? This implies that you might benefit them and yourself by loaning them money, if you could overcome the barriers that have prevented others from doing so. It also implies that if you were going to help them, you might want to do it now rather than later. But this doesn’t change the fact that there is a tradeoff between helping today vs. tomorrow. And if there will be people later in a similar situation of need, you can do more good by waiting to help them later.

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  • Carl

    ” or we happen to live in an unusual time of great need or danger. People who think that global warming and ecological collapse will soon make the world a hell can’t believe this”

    Many of them believe that averting emissions now will be much cheaper than charity to deal with the hard-to-reverse effects of emissions later, especially those who worry about reaching thresholds to trigger positive feedbacks of carbon release from natural reservoirs.

    “and that by giving over a period of time you may learn from your early gifts to better pick later gifts. But it should be enough to start this learning process when you are older; your life experience will help you learn faster then.”

    Fluid intelligence and ability to learn decline steeply with age on average.

    • http://overcomingbias.com RobinHanson

      Since the harm happens so much later, many seem to think that paying to emit one less ton of carbon today helps less than could the result of investing that money today for returns in a century or more.

      I don’t see fluid intelligence as being nearly as useful as experience in judging the effectiveness of charity and their organizations.

      • IMASBA

        Why do people believe that? Wealth doesn’t just grow on trees and you can’t eat dollar bills. Simply investing won’t produce positive returns, only technological and societal progress will. Do these people believe technological and societal progress will be hampered by minor reductions in CO2 emission today (I suppose it’s possible if you shut down the power in science labs, but what if the reduction comes from people walking to the supermarket instead of driving and from better home insulation)?

      • B_For_Bandana

        > but what if the reduction comes from people walking to the supermarket instead of driving

        Oh man. Let me count the ways.

        1. Less competition between supermarkets — if you have to walk, you don’t care anymore that the Shop Rite 2 miles away has better price and selection than the FoodTown 1.5 miles away. You shop at FoodTown now. This means all grocery store service and price gets worse, since each store in an area is now a semi-monopoly. (Alternatively, grocery store density rises until competition is significant again, but this destroys economies of scale big stores now presently enjoy, takes up lots of labor to run all the stores, and, again, prices increase, service declines).

        2. No more buying in bulk, which adds to grocery bills.

        3. Lots more time spent on shopping, because a trip takes more time, and because you can only buy what you can carry, more trips per week. Less free time, more fatigue, higher chore load, worse relationships, higher stress.

        4. More eating out, especially at fast food places, to replace having to buy and tote home groceries. All the reasons people don’t bother to cook now, strengthened. And what does that do for the environment?

        I guess the point here is that being able to buy food with minimal hassle *is* an instance of technological and societal progress.

        > and from better home insulation

        Just increases AC bills in the summer.

      • IMASBA

        “Less competition between supermarkets — if you have to walk, you don’t care anymore that the Shop Rite 2 miles away has better price and selection than the FoodTown 1.5 miles away.”

        I was referring to the American habit of driving less than a mile to buy a a bottle of soda (because of low gas prices compared to the rest of the developed world and just general lazyness), so the assumption was that driving didn’t really increase the effective shopping range, maybe I should have clarified that. Anyhow, I do not see supermarkets as particular giants of innovation, I may be mistaken in that view, but I don’t think so.

        “2. No more buying in bulk, which adds to grocery bills.”

        It may add to your bill but it doesn’t really cost society as a whole a damn thing, not even time because you don’t have to look for a parking spot and you’re shopping close to home anyway.

        “Just increases AC bills in the summer.”

        I don’t think you understand how insulation works. Insulation does keep homes cooler in the summer. This might be the better choice as I really can’t see any economical downside to insulation, not even tangential (unlike the supermarket example where the tiny bits of innovation they supply could in theory be hampered) just like there is no downside to building more fuel efficient cars.

        My point is that it’s often a case of people coming up with reasons not to cut emissions now because they don’t want to change their habits, not because it’s really (supposedly) better for the environment in the end. I can guarantee you that the vast majority of activities we burn fossil fuels for do not influence the development of some future anti-climate change technology.

      • VV

        Less competition between supermarkets

        I live in an European city, not particularly densely populated as European cities go, and there are three supermarkets plus various smaller shops within easy biking distance (15 mins) of my house. Competition doesn’t seem to be an issue.

        (Alternatively, grocery store density rises until competition is
        significant again, but this destroys economies of scale big stores now
        presently enjoy, takes up lots of labor to run all the stores, and,
        again, prices increase, service declines).

        I doubt there is a significant price difference when you take into account the costs of car trips. Small generic grocery shops lack some items, but usually you can locate a speciality ship nearby. Failing at that, you can always buy online and have the items delivered to your house.

        No more buying in bulk, which adds to grocery bills.

        Unless you are buying for lots of people the amount of fresh food items you can buy is limited by its shelf life.

        Bulk purchases are still possibly with home delivery, which still uses motor vehicles but is much more energy efficient than driving your personal car back and forth to the store.

        Lots more time spent on shopping, because a trip takes more time,

        Really?

        Less free time, more fatigue, higher chore load, worse relationships, higher stress.

        Walking or biking is generally considered far less stressful than driving (unless you live in really extreme climates, I suppose).

        More eating out, especially at fast food places, to replace having to
        buy and tote home groceries. All the reasons people don’t bother to cook
        now, strengthened. And what does that do for the environment?

        I suspect that fast food restaurants are much more energy efficient than home cooking, due to economies of scale. Unless you have special dietary needs, health issues can be avoided by choosing wisely (at least in all European countries I’ve seen. If you live in a place where the only fast food restaurants around are McDonalds’ and Burger Kings, then you may have a problem). Prices are an issue (obviously you pay for the labor), but I suppose that peoples decision to eat out are dominated by commute time and cooking time tradeoffs and social considerations, not by the availability of food items in their houses.

        Just increases AC bills in the summer.

        On the contrary, it decreases it.

  • IMASBA

    “One claim I made that I’ve before is that because real interest rates (i.e., average investment rates of return) tend to be positive, it is more effective to wait, investing now and then donating later.”

    That’s a bit narcissistic isn’t it? Only if you believe that you are more charitable and better at selecting charities than most other people does it matter whether you save up before donating, or not. If you donate now instead of investing then the future returns you miss out on simply go to someone else (perhaps even the poor sod that received your charity money and invested it in a market stall). If that other person is just as charitable as you then what’s the problem?

    • B_For_Bandana

      Those are not high bars to clear. If you’ve read and understood any significant fraction of GiveWell’s blog posts, and donated say 5% of your income accordingly, then you are way more charitable and better at selecting charities than average.

      Those advantages may not be fair; in a just world we would not have them. But we do. We are better at giving.

      It is mildly disturbing how many discussions about efficient charity end up making me feel like a super villain.

      • Stephen Diamond

        The point really doesn’t require reference to third parties. Hanson respects recipients’ utility function, and his argument presupposes that recipients save. If recipients are better off saving, why arrogate to oneself the decision to save? What makes that the better decision?

      • Michael Vassar

        You really should try to see, in such a situation, whether from the outside view perspective, you are an aspiring super villain.

  • Stephen Diamond

    But at the margin, a person who saves another dollar, or chooses not to borrow another dollar, must typically expect the financial returns from their investments will help them more in the future than will such indirect effects of spending today.

    The logic implies that if you donate money you would have saved for future donation, you have created a smaller benefit. But the conclusion you’re reaching for encompasses saving money you otherwise would have donated. You want people to act on the advice, “Save now and give later.” But you have only justified the advice “Don’t give now what you would have saved and later donated.” The problem is you are instructing people, and their following the advice as given doesn’t insure they would have saved the money without the advice–on which the marginal analysis depends.

    That’s one problem. Another is a lurking fallacy of composition. If everyone followed your advice, you then have to face the question of how that change in aggregate demand would effect the interest rate. Most economists think we need to have people spend more to increase economic growth.

  • Stephen Diamond

    Wrong thread. Apologies.

  • Ely Spears

    Just for my own attempt to clarify whether I understand this: imagine you gave a dollar of charitable donations to a person in need. If the person was rational and saw some benefit to saving that dollar, they might give it right back to you and say, “here, you save it, since you can more easily participate in investments with on-average positive rates of return than what could invest in from my situation of poverty. I will bear with the poverty for additional time, and delay consuming poverty-reducing goods or services, on the anticipation of receiving the compounded returns on that donated dollar later on when I need them even more.”

    I don’t see anything wrong with this argument. But I wonder what the behavioral economic implications are. There are many financial anomalies. It’s not hard to imagine that there are regimes of low status iin which there is almost no utility to gains delayed for the future because you have to live through a path of low-status-ness to get there and avoiding the low-status-ness is what actually makes you happy. There’s some kind of time integration of status, maybe, so that a big discontinuous jump up in status in ~25 years from now is worth a lot less than a steady increase of status, even if the discontinuous jump up was to an absolutely higher location.

    The Last Place Aversion paper by Kuziemko, et al. might highlight what I mean. People ten to prefer a wealth distribution that keep them above last place, even if some distribution that puts them in last place also makes them wealthier in an absolute sense. If this really is part of the utility function for making people happier, then waiting to donate would be another kind of “show that you care” paradox. You’d be declaring that some external measure of utility (e.g. more total donation due to rates of return) is “the” good thing to be maximized, even though there might not be a montonic relationship between this and the utility that it actually brings from a behavioral point of view.

    • http://overcomingbias.com RobinHanson

      It needn’t be about helping someone now vs. later. You might prefer to help someone else later.

  • http://www.facebook.com/CronoDAS Douglas Scheinberg

    “After all, why give up money today if that both gives you less to spend today, and gives you less in the future?”

    Because there aren’t futures contracts in everything. If I want to be able to eat a McDonalds hamburger next year, I can’t do that by spending money today; I have to hold money and spend it next year. And the most secure way I have to hold money is to give it to a bank.

  • dmytryl

    I’ve made similar point for x-risk and other self proclaimed high impact organizations, albeit for another reason – if you encounter an x-risk organization which clearly could look a lot better (e.g. the leaders could have had degrees, could have had some actual employment history, it could have been certain that they are honest because they made some sacrifices now to increase their survival later, etc), the utility of donation may easily be well below utility of keeping money in bank and waiting for something that looks less shady.

    • http://www.facebook.com/beachhouseguy Alexander Gabriel

      “if you encounter an x-risk organization which clearly could look a lot better (e.g. the leaders could have had degrees…”

      I will admit to actually having some related thoughts recently about the current x-risk organizations. It’s not necessarily about certain (ahem) leaders not having degrees but that I feel like their strategies and goals could use work. However one does wonder if better organizations will just come along. One donation strategy might be therefore splitting your money between donating now and later, hoping to use current donations to develop contacts with whom you could discuss ideas and hopefully nudge toward what you believe is a better approach. It might make sense to donate at least small amounts even to organizations that you believe have poor strategies or low efficiency as long as their goals and human capital were good enough.

  • Lord

    This avoids the real question which is what is the real return of giving. It is not at all hard to believe this has a positive real return, and may well exceed any real return on savings. This won’t be the case between your present and future self, and it won’t be the case for much charity that operates mostly for status, but it shouldn’t be difficult to find one that does. Giving now may be consumed, but that consumption can represent investment, for education or research for example. There is uncertainty about whether and how much those may pay off, but there is in all investment. Saving does not always mean investment, and consumption does not always mean less investment. Helping now can mean helping more in the future though it may not come with your name attached.

    • IMASBA

      Yes, Robin did assume charity won’t return as much as investment. As you point out that isn’t always true. Another question is: “if it is better to invest/save, then you can start postponing the donation indefinitely, which doesn’t help anyone, you’re gonna have to donate sometime even though there will always be a juicy investment return just over the horizon, so why not just donate now?”

      • http://overcomingbias.com RobinHanson

        I’m not making any assumptions about “returns to giving.”

      • Stephen Diamond

        I’m not making any assumptions about “returns to giving.”

        Of course you are. If you’re not, it would be impossible to devise a scenario where it’s better to give now. But IMASBA has done so: if the recipient saves and donates better than you, you should donate now. “Bandana” urges your contrary assumption about recipients and third parties is reasonable, but no one has argued that it isn’t an assumption, as you now assert.

      • IMASBA

        Yes you are, implicitly, but still.

        What is your reply to my second point? When have you saved/invested “enough”? The argument of saving/investing to donate more later being better can be extended until the end of time (when you die you just make someone inherit the account and the cycle repeats) so you get a world where no one is donating but everyone thinks they’re improving the world by saving up for a donation that they keep postponing indefinitely because at any given point in time it’s better to save/invest “just a little bit more” than donate at that point in time. Surely you need other arguments to determine the best time to donate, in fact you should only look at those other arguments because the “saving/investing always being better” argument doesn’t lead anywhere, it’s a pretty useless argument, except for people thinking about it and learning that it and other arguments similar to it are useless, saving them time the next time they come across a similar argument.

      • Stephen Diamond

        The argument of saving/investing to donate more later being better can be extended until the end of time

        I don’t think this argument is valid: it only holds if time is infinite, and it merely expresses a paradox of infinite quantities. (See Can infinite quantities exist?http://tinyurl.com/aqcy99w )

      • IMASBA

        Uhm, okay, that was funny…

  • Peter McCluskey

    This assumes people are perfectly altruistic. Realistic models of people involve enough signaling motives for charity to make this irrelevant.

    Analyzing it in dollar terms won’t give us expected utility if people will be redesigned to be almost as happy when poor as when rich.

    The main reason I sometimes delay charity is due to the expectation that I’ll identify better charities later. I’ve changed my opinion about charities often enough that I predict in a few years I’ll think my choices are better than now.

    • http://overcomingbias.com RobinHanson

      My talk was all about people not being altruistic.

  • http://www.facebook.com/ericgreen54 Eric Green

    I believe that either Ellie is correct or we value a reduction in current suffering more than the present value of a reduction in future suffering. The former could easily be true, that is, a particular charitable gift could produce gains much more than the current rate of interest, certainly as measured by the donor, but perhaps by many. Getting rid of Malaria now might, for example, produce benefits for society much greater than the present value of waiting to attempt to achieve this goal. And, with respect to my second point, we are a biased and emotional lot. We do not like to see people suffer and distance ourselves from suffering. We often ignore it…auch as in WWII, and convince ourselves it is not bad or that we must exist in this world where suffering exists. This, of course, may not be the case in the future, and, in any event, we may not personally know of those who suffer in the future. To help someone who is alive today is something we can effectuate with certainty (although the efficaciousness of the help may be uncertain). This certainty obviously may have more value than the ambiguous value of a future gift.

  • John

    >unless charity recipients are saving nothing and borrowing as much as they possibly can

    And if they are? My impression is that ‘charity recipient’ and ‘high liquidity’ tend to be mutually exclusive.

  • AspiringRationalist

    While historically, real interest rates tend to be positive, they’re currently negative. You have to go all the way out to 20 years before they become approximately zero: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

    (and that’s ignoring tax considerations)

    • http://overcomingbias.com RobinHanson

      You are thinking of “riskless” interest rates.

      • Robert Easton

        Why is that wrong? EMH says we shouldn’t expect any more return from “risky” investments. Those may even pay negative nominal rates, not just negative real rates.

      • Daniel Carrier

        In general you can diversify your investments to lower risk. However, there’s a limit to how much you can do this. If you invest evenly, no one company’s failure will hurt you much, but a market downturn will. There are companies whose success has a negative correlation with the market, but since you can’t get rid of risk well without them, that just means that they’re priced as if they have negative risk. If you want risk lower than you can get by diversifying, you’re going to have to pay for it.

      • AspiringRationalist

        Actually, the EMH says that taking on additional risk is the only way to increase your expected return.

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  • Sophronius

    Hanson: In your argument you implicitly assume that the charity recipients are rational in deciding whether or not to borrow or spend money. If this is the case, isn’t it then also best to give them the money now as it is assumed that they themselves will use it optimally regardless?

    Of course I don’t agree with your implicit assumption. Charity recipients in third world countries are more than likely less well equipped to make sound economic decisions than we are. As such it is far more efficient to use our superior (and expensive) economic education to decide for them whether saving or spending is more efficient, than it is to derive the correct decision by looking at their behaviour.

  • Stephen Diamond

    When a person chooses to save financially, they choose to spend a bit less in their usual ways, in order to give money to someone else, in the expectation of getting money back from that someone else at a later date. If they had instead not saved, and spent the money instead, that spending may well have also indirectly benefited them in the future. They might buy some medicine, get more exercise, get more sleep, try out some new products, make some new friends, or learn some new skills, any of which might help their future self.

    But at the margin, a person who saves another dollar, or chooses not to borrow another dollar, must typically expect the financial returns from their investments will help them more in the future than will such indirect effects of spending today. In fact, they should expect this savings will benefit their future self more than any of these other ways of spending today.

    This is Robin’s new argument. I don’t think anyone has directly addressed it or shown they’ve understood it. I certainly haven’t.

    At the margin, the recipient will be indifferent between spending or saving. He also (at least infinitesimally) prefers the bundle of future benefits obtained from saving than from spending. This is the new comparison Robin introduces into the marginal analysis, but how can it help? You can’t justify an inference from how money should be allocated in the aggregate from an analysis at the margin. What am I missing?

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  • http://www.facebook.com/beachhouseguy Alexander Gabriel

    “People who think that global warming and ecological collapse will soon make the world a hell can’t believe this, nor can those who fear great disruption in an em transition.”

    Has anyone explicitly made this argument for donating soon? I would be interested to see coherently argued cases for both sides. I mean, take the number that Bostrom threw out for the risk of human extinction in this century of 19% as estimated by various experts. If we stick to that 19%, does it still make economic sense for a current twentysomething to wait fifty years? And personally I would guess a higher risk.

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  • Kris Zyp

    I’ll propose another way of assessing this trade-off. Generally in for-profit investing, most investments tend towards an equilibrium of return for the unknowledgeable or at least average-knowledge level investor. Investors often tend to make higher than average returns when they have a higher than average knowledge of a certain investment strategy (whether it be real estate, stocks, etc.). Perhaps charitable giving is governed by the same principle. One can expect greater returns (on average) in charitable investments (except not for oneself, for the recipient) by giving now, if one has greater expertise in development economics and health than they do in other investment opportunities, whereas if you are more of an expert in real estate, or stocks, you probably can get a greater return (on average over the long term) by investing now and giving later.

    Anyway, this is just an idea I am toying with, do you think there is any merit to this approach?

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