Most donors get risk wrong

Linkpost for my Substack piece, lightly adapted.  Donors are holding AI wealth at enormous risk. Their giving is often extremely risk-averse. “What is the most common mistake donors make?” This is one of the questions I get asked most as a donation adviser. Often, I say that it’s risk tolerance. Many donors have risk backwards. They hold the money they plan to give at close to maximum risk, often in a single company’s stock, then give it away at close to minimum risk, backing only the most heavily evidenced organisations. Getting it the right way round means working at three levels: de-risk the wealth that funds your giving, diversify your grant portfolio, and take more risk inside it. What do most donors get wrong about risk? Candidly - almost everything. The majority of individual donors are distributing risk carelessly across multiple axes. Take the distribution of risk between wealth and grantmaking, for example. Many donors are taking extremely large risks with their capital, whilst only giving to massive organisations backed by 24 randomised controlled trials (RCTs). That’s two risk decisions taken with the same money, sometimes without noticing either. AI equity holders are a clear case. Many are committed to the most rigorously evaluated forms of giving, but hold their wealth in a single stock. More than $1trn came off semiconductor and AI hardware stocks in July. If your wealth sits in one AI company - public or private - the market that prices these companies just moved a long way. You should therefore be thinking actively about how much risk you’re willing to take with these funds, and, as I’ll argue, consider demanding less certainty before giving them away. How much risk should I take with my charitable giving? If you are a large donor: more risk than you (probably) take now at the grant level, and less with the wealth itself. Most donors should give their core funds to low-risk, evidence-backed giving; commit a genuinely risky bucket to funds that make enough grants to survive a high failure rate; and keep a small slice for direct bets. As a starting point, this could be 70% to the core, 20-30% through risk-tolerant funds and 0-10% directly to moonshots. On the wealth side, Anthropic staff had the chance to sell some of their shares in April. However, buyers were left unable to purchase their target amounts, as staff chose to hold on to their equity. In this instance, the bet has paid off handsomely - the company has since been valued at $965bn post-money. This is, however, an extremely risk-tolerant approach. Many staff at frontier labs hold most of their wealth in the undiversified volatile stock of a single company. Single stocks are a wild ride. Hendrik Bessembinder studied every US common stock since 1926 - around 26,000 of them. Most returned less over their lifetime than one-month Treasury bills, and the single most common lifetime outcome was a complete loss. Just 4% of companies account for the entire net gain of the US stock market in the same time period. Anthropic may well be one of the exceptions that does extremely well. But we don’t need a failure to get hurt - as July showed, concentration means the money EA is somewhat counting on could move a long way in a few days. Much of this concentration isn’t chosen - lock-ups and sale windows can put constraints on donors. At the margin, however, staff are choosing: whether to sell into a tender, how much to diversify when they can, and when to start giving. What would happen, meanwhile, if a major donor took these sorts of risks in their grantmaking? In my experience, most would quit after a year. This isn’t because donors don’t understand variance - many donors built their money through judicious risk-taking, either in companies they founded or by directly trading volatile assets. Instead, I think it’s because a failed grant hurts more and is more embarrassing than a failed investment. It can be very difficult to explain that a grant did not succeed, whether to your spouse, your co-founders, the friend who recommended the nonprofit or to yourself. The reputational and emotional cost often outweighs the financial loss. In addition, donors don’t swiftly cut their losses. Venture funds drop failing bets quickly, guided by clear pricing signals. Donors don’t get any signal without robust grant monitoring - actually something the EA ecosystem is seriously bad at, as I will argue in a future post - and they don’t want to admit a mistake or let down a favoured nonprofit anyway. So the failing grant keeps its funding. It’s less ‘costly’ overall to keep giving money to a charity that isn’t succeeding than it is to change direction, even in EA. Accordingly, most donors act in a way that is inconsistent with rational risk tolerance. How should I spread risk across my giving? Donor confusion often starts with conflating different types of risk. Risk at the grant level can sit in at least three different places: Intermediary risk. Using an inte