
I’m basically fine with investing in evil (2007) - apsec112
http://blog.givewell.org/2007/01/20/21/
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schimmy_changa
I think most people miss the point of public, large-scale divestment (as
opposed to private, small scale consumer ethical purchases which I find not
super useful).

Divestment by a well-respected organization like the Gates foundation is a
signal to others: a signal that a particular industry is morally unappealing
to a society, so much so that it's days are numbered. Thus, it's a bad
investment, as likely you will lose capital _in the very long term investing
horizon_.

If this sounds a bit circular, you're right! You're looking as an activist to
start a spiral: first a few high profile, respected institutions signal that
an industry is no longer acceptable to society, then all investors start to
wonder about the viability, then all investors start pricing that risk into
investment, then startup capital dries up, and eventually you see a slow
decrease in power of a once dominant industry.

Generally that's a bit naive and simplistic, but you get the idea. Who on HN
is willing to start a tobacco startup today in the US? No? Didn't think so :)

~~~
usrusr
“a signal that a particular industry is morally unappealing to a society, so
much so that it's days are numbered.“

Or it might be seen as a signal that said industry might be full of
undervalued stock, because a certain fraction of potential buyers opts out
without even considering potential revenue and so on, lowering demand in the
stock. If enough investors are following this heuristic (instead of actually
analyzing the true potential of the companies in question), then high-
visibility ethical divestment might even lead to a twisted amorality bubble.

For the tobacco example, I think it's the other way around: if (and only if)
there is policy against an industry, then divestment will make that policy
appear a lot more serious. But this signal would be even stronger when the
divestment is done by "pure market rational" actors, that are not influenced
by ethics (or that at least give the outside appearance thereof).

~~~
notahacker
It largely depends on critical mass. One large institutional investor pulling
out isn't going to harm a company because a pure profit seeking firm will pick
up the slack.

But a significant proportion of investors that won't touch a stock _is_ going
to have an impact, because even purely rational investors are going to
consider the fundamentals of the business affected by the implied lower future
liquidity, higher costs of capital and lower ability to retain senior
executives with attractive equity offers in future. Even though that impact is
unlikely to be large, it's probably large enough for firms keen to avoid being
labelled "evil" by activist investors being encouraged to spend a bit more on
CSR, tightening up their supply chain and abandoning an unpopular policy or
two. It's that secondary effect of encouraging ordinary firms to be more
ethically conscious - which GiveWell's article doesn't mention - that's the
larger one.

A good analogy is democracy. A few people voting for a fringe candidate
doesn't harm the mainstream candidates; awareness there's another party
complicating the result might even boost the mainstream candidates' votes. As
soon as the fringe party gains some sort of critical mass, however, one of the
mainstream candidates is likely to start wooing their supporters by adopting
one of their more inoffensive policies in some form.

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gohrt
Standard arguments used in the article:

1\. "It doesn't matter what I do -- If I don't do some particular evil,
someone else will do that evil in my place" aka "I'm just one person, my vote
is irrelevant"

2\. "punishing past mishbehavior is not a deterrent to future misbehavior" (In
this case, the punishment would be lowering the stock price of a company, by
not buying its stock, which punishes the people who (gave money to people
who... recursively) gave money to the founders.

~~~
ikeboy
Also, the cost of preventing the evil is not worth it. It would be more
efficient to spend the money on what you're good at.

~~~
Retra
Better: rationally prioritize the means of achieving your goals. Really it has
nothing to do with "what you're good at," because you might be very good at
being evil.

~~~
ikeboy
S/what you're good at/what means of achieving your goals you're good at

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Eliezer
Hi! This is the Market Economics Fairy! If you think that not investing in
evil stocks can predictably lower the price of their cash flows, that violates
the weak form of the efficient markets hypothesis! There's nothing else to
say! The end!

~~~
laughinghan
I'll bite.

Hi! This is the Real World Fairy! If you think the real world perfectly
conforms to the efficient market _hypothesis_ , that violates obvious facts!
There's a lot more to say because economics is complicated! The end!

~~~
p4wnc6
But to believe your choice to divest could predictably cause a sustained
downward price movement means you believe that to whatever extent the market
is inefficient, _you_ can predict the effect of the inefficiency. If you can
really do this, you wield enough power to go about eliminating evil in some
way more effective way than slow divesting.

The bigger issue for me is not that the long-term price impact of divesting is
unpredictable (though that's true too). The issue for me is that divesting is
a _selfish_ action designed for the divesting party to benefit from the
current price of the asset's stream of future cash flows.

By divesting in an oil company, say, you are realizing a cash gain roughly
equal to the market's appraisal of the discounted stream of future cash flows
of the company, per share. Instead of owning a piece of that oil company value
in the form of a stock share, you've just converted it to dollar format. You
still benefited (if you experienced capital gain on the asset) via the
operation of that oil company, and if that company obtained value by inducing
a negative externality on the world (say, pollution), some tiny slice of your
cash from divesting is equal to the gain from that unpunished externality.

If you actually cared about rectifying the problem of the externality, you
could instead _give your shares away for free_ to the parties who are damaged
by the externality.

If you think the oil company pollution will cause oceans to rise and will
displace Gulf Coast families, you could give away your shares of Exxon to
those at-risk coasters, paying the cost of your lost shares to subsidize their
hedge against suffering the costs of some Exxon externality.

By divesting, all you would do is to fashion signal that you don't like Exxon.

Apart from some remarkable ability to forecast exactly when your divestment
will cause a sustained price drop (which you don't have), divesting is sort of
like holding up a sign that says "Honk if you don't like _____!" \-- it's a
fine thing to do conditioned on various goals or preferences, but is not near
the highly optimal end of the spectrum of activist actions you could take.

~~~
TheOtherHobbes
Actually the rational thing to do would be to start a class action suit
forcing the entire fossil fuel industry to pay compensation for the
environmental damage it's causing, and to compensate various national
economies for the opportunity cost of getting in the way of a move to a clean
energy economy.

Which is pretty much what's been happening to Big Tobacco. And it's
_compensation_ not _prevention_.

In tobacco's case, it isn't going to bring any dead people back to life.

I think most people, if asked, would say they'd prefer it if someone they
loved hadn't died. Compensation can only go so far to fix that - just as
getting the carbon industry to pay compensation won't un-flood any homes that
are now underwater.

But this is only necessary because the so-called efficient, so-called market,
so-called hypothesis is rhetorical bullshit - _precisely_ because so-called
market pricing is calculated in ways that exclude the true long-term costs of
the external consequences of short term profit.

A genuinely efficient market would have to factor in the reality-based pricing
consequences so that very bad effects became so financially unattractive they
were prevented before they could happen.

Without that, you have a wealth extraction playground relying on political
privilege to pretend to be something it very much isn't.

~~~
p4wnc6
Whether a class action is the right approach seems debatable to me.

If parties possibly damaged by the externality are entitled to shares of any
profit derived from that externality, it acts as an incentive for the company
to derive profits in others ways. Rather than a class action that, as you
correctly point out, merely gives victims compensation for damage done, it
could be better to give _potential_ victims some form of corporate governance.

This is all very hypothetical. The chances that an organization couldn't find
some political maneuvers to dodge really paying for damages they cause are
low. It would be like whack-a-mole. If you incentivize the company to steer
away from ocean-raising pollution by letting potential coastal victims have
some control, well then they'll just find some other group to extract profits
from via unnoticed or unpunished victimization.

I'm not sure society wins by engaging in this game of whack-a-mole. The
company keeps everyone distracted, the barriers for establishing class action
results are high, it's inefficient for us to spend that much time and money on
legal routes, and in the meantime, many bad actors simply get away with it and
continue to extract profits and consumption opportunities at the expense of
others.

This is one reason why I prefer to think about direct actions I can do that
demonstrably help. Giving to Against Malaria definitely helps someone. Getting
all wrapped up in long-term political advocacy for changing the entire
framework in which publicly traded companies operate, so as to prevent them
from extracting profits via unfair victimization ... that seems like a
politics-is-the-mindkiller situation, which will probably do nothing but burn
me out and prevent me from doing other things that actually could have helped.

Don't get me wrong. It's depressing that it's like this and doesn't bode well
for moving towards a more egalitarian society (which I think would be better).
But nonetheless it's just the world we live in, litany of Gendlin, yada yada
yada.

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imgabe
If we could abolish something we dislike by refusing it an "official" source
of funding, we wouldn't have an illegal drug trade. Clearly, that isn't the
case.

There's no Fortune 500 companies selling heroin, yet heroin suppliers get
capital _somewhere_ to run production facilities.

If the demand stays the same, it will get funded somehow, because there's
profit to be made. I can respect the decision of any investor to not be a part
of something they find morally repugnant, but let's not pretend like that's
going to cause the demand for the morally repugnant thing to disappear.

~~~
talideon
There are plenty of drug companies out there selling heroin. However, they do
it under the generic name 'diamorphine'. Heroin was a Bayer trademark that
became a colloquial term for the drug.

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applecore
_> The first thing I want to point out, which I haven’t seen acknowledged
enough, is how extremely, extremely minor the impact of a foundation’s
investing decisions are on the companies it invests in._

The irony is that individual company selection has an overall negative impact
on foundation funds' returns. Asset allocation (beta) is so much more
important than security selection (alpha) that it explains more than 100% of
funds' returns.

------
mrweasel
I'm just miffed that the company managing my pension somehow feel that they
need to my moral guardian.

\- "How do you want your pension fund invested?"

\- "Weapons would be good"

\- "Sorry, we can't morally justify that"

Well why not? The only that that's happing now is that people who aren't me
will be making a profit on those stocks. If running a munitions company is
legal, then it shouldn't be morally wrong for my pension to be invested in it.

~~~
golergka
Praise the open market: you can choose another company to manage your pension.

~~~
mrweasel
In Denmark, no. I can choose another company, but they all have the same moral
issues.

~~~
golergka
Oh.

That would sound like a good country to start another pension company if I
didn't know the difference between theoretical free market idea and real life.

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thinkcontext
Coincidentally last night I was reading about the role of the cotton gin of
the expansion of slavery in the American South [0]. Such mechanical inventions
were the stuff of the era's startups. The cotton was largely shipped to the
UK, which had outlawed slavery, where it was used in their most important
industry [1]. There was some debate about the morality of this, but as we
know, slavery was not ended for lack of demand for its products.

[0] "The Industrial Revolutionaries: The Making of the Modern World 1776-1914"
Gavin Weightman [1] The book quotes Karl Marx "Without slavery, no cotton;
without cotton, no modern industry"

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matt_morgan
Not a bad article, but there are no ideas in it that one can't arrive at with
a most basic, a priori understanding of charitable giving. No surprise; the
author wrote it just a few years out of college, in the year that he founded
this givewell.org:

Holden Karnofsky | Co-Founder and Co-Executive Director. Holden graduated from
Harvard University in 2003 with a degree in Social Studies, and spent the next
several years in the hedge fund industry. He co-founded GiveWell in mid-2007.

~~~
jcrben
Well, you need a basic understanding of equity markets too, and it seems that
most who know one do not know the other. At least, they aren't writing about
it.

Divestment of evil companies drives down their valuations; consequently, those
who invest in evil can actually earn greater returns. If those evil companies
are not raising capital, their operations are unaffected. It's simple but
widely misunderstood.

