Businesses and organizations suffer extremely high mortality rates; one estimate puts it at 99% chance of mortality per century. (This ignores existential risks and lucky aversions like nuclear warfare, and so is an underestimate of the true risks.) So to survive, any perpetuity has a risk of 0.01^120 = 1.000000000000001e-240. That’s a good chunk of the reason to not bother with long-term trusts right there! We can confirm this empirically by observing that there were what must have been many scores of thousands of waqfs in the Islamic world—perpetual charities—and very few survive or saw their endowments grow. (I have pointed Hanson at waqfs repeatedly, but he has yet to blog on that topic.) Similarly, we can observe that despite the countless temples, hospitals, homes, and institutions with endowments in the Greco-Roman world just 1900 years ago or so—less than a sixth of the time period in question—we know of zero surviving institutions, all of them having fallen into decay/disuse/Christian-Muslim expropriation/vicissitudes of time. The many Buddhist institutions of India suffered a similar fate, between a resurgent Hinduism and Muslim encroachment. We can also point out that many estimates ignore a meaningful failure mode: endowments or nonprofits going off-course and doing things the founder did not mean them to do—the American university case comes to mind, as does the British university case I cite in my essay, and there is a long vein (some of it summarized in Cowen’s Good and Plenty) of conservative criticism of American nonprofits like the Ford Foundation pointing out the ‘liberal capture’ of originally conservative institutions, which obviously defeats the original point.
(BTW, if you read the waqf link you’d see that excessive iron-clad rigidity in an organization’s goal can be almost as bad, as the goals become outdated or irrelevant or harmful. So if the charter is loose, the organization is easily and quickly hijacked by changing ideologies or principal-agent problems like the iron law of oligarchy; but if the charter is rigid, the organization may remain on-target while becoming useless. It’s hard to design a utility function for a potentially powerful optimization process. Hm.… why does that sentence sound so familiar… It’s almost as if we needed a theory of Friendly Artificial General Organizations...)
Survivorship bias as a major factor in overestimating risk-free return overtime is well-known, and a new result came out recently, actually. We can observe many reasons for survivorship bias in estimates of nonprofit and corporate survival in the 20th century (see previously) and also in financial returns: Czarist Russia, the Weimar and Nazi Germanies, Imperial Japan, all countries in the Warsaw Pact or otherwise communist such as Cuba/North Korea/Vietnam, Zimbabwe… While I have seen very few invocations recently of the old chestnut that ‘stock markets deliver 7% return on a long-term basis’ (perhaps that conventional wisdom has been killed), the survivorship work suggests that for just the 20th century we might expect more like 2%.
The risk per year is related to the size of the endowment/investment; as has already been point out, there is fierce legal opposition to any sort of perpetuity, and at least two cases of perpetuities being wasted or stolen legally. Historically, fortunes which grow too big attract predators, become institutionally dysfunctional and corrupt, and fall prey to rare risks. Example: the non-profit known as the Catholic Church owned something like a quarter of all of England before it was expropriated precisely because it had so effectively gained wealth and invested it (property rights in England otherwise having been remarkably secure over the past millennium). Not to mention the Vatican States or its holdings elsewhere. The Buddhist monasteries in China and Japan had issues with growing so large and powerful that they became major political and military players, leading to war and extirpation by other actors such as Oda Nobunaga. Any perpetuity which becomes equivalent to a large or small country will suffer the same mortality rates.
And then there’s opportunity cost. We have good reason to expect the upcoming centuries to be unusually risky compared to the past: even if you completely ignore new technological issues like nanotech or AI or global warming or biowarfare, we still suffer under a novel existential threat of thermonuclear warfare. This threat did not exist at any point before 1945, and systematically makes the future riskier than the past. Investing in a perpetuity, itself investing in ordinary commercial transactions, does little to help except possibly some generic economic externalities of increased growth (and no doubt there are economists who, pointing to current ultra-low interest rates and sluggish growth and ‘too much cash chasing safe investments’, would deprecate even this).
Compounding-wise, there are other forms of investment: investment into scientific knowledge, into more effective charity (surely saving peoples’ lives can have compounding effects into the distant future?), and so on.
So to recap:
organizational mortality is extremely high
financial mortality is likewise extremely high; and both organizational & financial mortality are relevant
all estimates of risk are systematically biased downwards, estimates indicating that one of these biases is very large
risks for organizations or finances increases with size
opportunity cost is completely ignored
Any of these except perhaps #3 could be sufficient to defeat perpetuities, and I think that combined, the case for perpetuities is completely non-existent.
Perhaps the many failed philanthropies were not meant to be permanent?
First, they almost certainly were. Most philanthropies were clan or religious-based. Things like temples and monasteries are meant to be eternal as possible. What Buddhist monastery or Catholic cathedral was ever set up with the idea that it’d wind up everything in a century or two? What dedication of a golden tripod to the Oracle at Delphi was done with the idea that they’d be done with the whole silly paganism thing in half a millennium? What clan compound was created by a patriarch not hoping to be commemorated and his grave honored for generations without end? Donations were inalienable, and often made with stipulations like a mass being said for the donators’ soul once a year forever or the Second Coming, whichever happened first. How many funny traditions or legal requirements at Oxford or Cambridge, which survive due to a very unusual degree of institutional & property right continuity in England, came with expiration dates or entailments which expired? (None come to mind.) The Islamic world went so far as to legally remove any option of being temporary! To the extent that philanthropies are not encumbered today, it’s not for any lack of desire by philanthropists (as charities constantly complain & dream of ‘unrestricted’ funds), but legal systems refusing to enforce them via the dead hand doctrine, disruption of property rights, and creative destruction. My https://www.gwern.net/The-Narrowing-Circle is relevant, as is Fukuyama’s The Origins of Political Order, which makes clear what a completely absurd thing that is to suggest of places like Rome or China.
Second, even if they were not, most of them do not expire due to reaching scheduled expiration dates, showing that existing structures are inadequate even to the task of lasting just a little while. Trammel seems to believe there is some sort of silver bullet institutional structure that might allow a charity to accumulate wealth for centuries or millennia if only the founders purchased the 1000-year charity plan instead of cheaping out by buying the limited-warranty 100-year charity plan. But there isn’t.
His second point is, I’m not sure how to summarize it:
Second, it is misleading to cite the large numbers of failed philanthropic institutions (such as Islamic waqfs) which were intended to be permanent, since their closures were not independent. For illustration, if a wave of expropriation (say, through a regional conquest) is a Poisson process withλ= 0.005, then the probability of a thousand-year waqf is 0.7%. Splitting a billion-dollar waqf into a billion one-dollar waqfs, and observing that none survive the millennium, will give the impression that “the long-term waqf survival rate is less than one in one billion”.
I can’t see how this point is relevant. Aside from his hypothetical not being the case (the organizational death statistics are certainly not based on any kind of fission like that), if a billion waqfs all manage to fail, that is a valid observation about the durability of waqfs. If they were split apart, then they all had separate managers/staff, separate tasks, separate endowments etc. There will be some correlation, and this will affect, say, confidence intervals—but the percentage is what it is.
His third point argues that the risk needs to grow with size for perpetuities to be bad ideas.
This doesn’t seem right either. I gave many reasons quite aside from that against perpetuities, and his arguments against the very plausible increasing of risk aren’t great either (pogroms vs the expropriation of the Church? but how can that be comparable when by definition the net worth of the poor is near-zero?).
A handful of relatively recent attempts explicitly to found long-term trusts have met with with partial success (Benjamin Franklin) or comical failure (James Holdeen). Unfortunately, there have not been enough of these cases to draw any compelling conclusions.
I’d say there’s more than enough when you don’t handwave away millennia of examples.
Incidentally, I ran into another failure of long-term trusts recently: Wellington R. Burt’s estate trustees managed to, over almost a century of investment in the USA during possibly the greatest sustained total economic growth in all of human history, with only minor disbursements and some minor legal defeats, no scandals or expropriation or anything, nevertheless realize a real total return of around −75% (turning the then-inflation-adjusted equivalent of ~$400m into ~$100m).
I think you might be misunderstanding my points here. In particular, regarding point 2, I’m not suggesting that the waqfs split, or that anything at all like that might have happened. The “split waqfs” point is just meant to illustrate the fact that, when waqf failures are correlated for whatever reason, arbitrarily many closures with zero long-term survivors can be compatible with a relatively low annual hazard rate. The failure of a billion waqfs would be a valid observation, but it would be an observation compatible with the belief that the probability that a new waqf survives a millennium is non-negligible.
In any event—I should probably have reached out to you sooner, sorry about that! Now unfortunately I’ll be too busy to discuss this more until June, but let me know if you’re interested in going over all three points (and anything else regarding the value of long-term philanthropic investment) once summer comes. I would sincerely like to understand the source of our disagreements on this.
In the meantime, thanks for the Wellington R. Burt example, I’ll check it out!
So to survive, any perpetuity has a risk of 0.01^120 = 1.000000000000001e-240.
The premises in this argument aren’t strong enough to support conclusions like that. Expropriation risks have declined strikingly, particularly in advanced societies, and it’s easy enough to describe scenarios in which the annual risk of expropriation falls to extremely low levels, e.g. a stable world government run by patient immortals, or with an automated legal system designed for ultra-stability.
ETA: Weitzman on uncertainty about discount/expropriation rates.
The premises in this argument aren’t strong enough to support conclusions like that.
Sure. But the support for other parts of the perpetuity argument like long-term real returns aren’t strong either. And a better model would take into account diseconomies of scale. Improbability needs to work both ways, or else you’re just setting up Pascalian wagers…
Expropriation risks have declined strikingly, particularly in advanced societies,
They have?
and it’s easy enough to describe scenarios in which the annual risk of expropriation falls to extremely low levels
Even easier to describe scenarios in which the risk spikes. How’s the Middle East doing lately? Are the various nuclear powers like Russia and North Korea still on friendly terms with everyone, and nuclear war utterly unthinkable?
ETA: Weitzman on uncertainty about discount/expropriation rates.
This seems to be purely theoretical modeling which does not address my many disjunctive & empirical arguments above against the perpetuity strategy.
Expropriation risks have declined strikingly, particularly in advanced societies
I see no reasons to conclude that. Au contraire, I see expropriation risks rising as the government power grows and the political need to keep the feeding trough full becomes difficult to satisfy.
it’s easy enough to describe scenarios in which the annual risk of expropriation falls to extremely low levels
“Easy to describe” is not at all the same thing as “Are likely”. Both utopias and dystopias are easy to describe.
I don’t think this is very hard if you actually look at examples of long-term investment. Background: http://www.gwern.net/The%20Narrowing%20Circle#ancestors and especially http://www.gwern.net/The%20Narrowing%20Circle#islamic-waqfs
First things:
Businesses and organizations suffer extremely high mortality rates; one estimate puts it at 99% chance of mortality per century. (This ignores existential risks and lucky aversions like nuclear warfare, and so is an underestimate of the true risks.) So to survive, any perpetuity has a risk of 0.01^120 = 1.000000000000001e-240. That’s a good chunk of the reason to not bother with long-term trusts right there! We can confirm this empirically by observing that there were what must have been many scores of thousands of waqfs in the Islamic world—perpetual charities—and very few survive or saw their endowments grow. (I have pointed Hanson at waqfs repeatedly, but he has yet to blog on that topic.) Similarly, we can observe that despite the countless temples, hospitals, homes, and institutions with endowments in the Greco-Roman world just 1900 years ago or so—less than a sixth of the time period in question—we know of zero surviving institutions, all of them having fallen into decay/disuse/Christian-Muslim expropriation/vicissitudes of time. The many Buddhist institutions of India suffered a similar fate, between a resurgent Hinduism and Muslim encroachment. We can also point out that many estimates ignore a meaningful failure mode: endowments or nonprofits going off-course and doing things the founder did not mean them to do—the American university case comes to mind, as does the British university case I cite in my essay, and there is a long vein (some of it summarized in Cowen’s Good and Plenty) of conservative criticism of American nonprofits like the Ford Foundation pointing out the ‘liberal capture’ of originally conservative institutions, which obviously defeats the original point.
(BTW, if you read the waqf link you’d see that excessive iron-clad rigidity in an organization’s goal can be almost as bad, as the goals become outdated or irrelevant or harmful. So if the charter is loose, the organization is easily and quickly hijacked by changing ideologies or principal-agent problems like the iron law of oligarchy; but if the charter is rigid, the organization may remain on-target while becoming useless. It’s hard to design a utility function for a potentially powerful optimization process. Hm.… why does that sentence sound so familiar… It’s almost as if we needed a theory of Friendly Artificial General Organizations...)
Survivorship bias as a major factor in overestimating risk-free return overtime is well-known, and a new result came out recently, actually. We can observe many reasons for survivorship bias in estimates of nonprofit and corporate survival in the 20th century (see previously) and also in financial returns: Czarist Russia, the Weimar and Nazi Germanies, Imperial Japan, all countries in the Warsaw Pact or otherwise communist such as Cuba/North Korea/Vietnam, Zimbabwe… While I have seen very few invocations recently of the old chestnut that ‘stock markets deliver 7% return on a long-term basis’ (perhaps that conventional wisdom has been killed), the survivorship work suggests that for just the 20th century we might expect more like 2%.
The risk per year is related to the size of the endowment/investment; as has already been point out, there is fierce legal opposition to any sort of perpetuity, and at least two cases of perpetuities being wasted or stolen legally. Historically, fortunes which grow too big attract predators, become institutionally dysfunctional and corrupt, and fall prey to rare risks. Example: the non-profit known as the Catholic Church owned something like a quarter of all of England before it was expropriated precisely because it had so effectively gained wealth and invested it (property rights in England otherwise having been remarkably secure over the past millennium). Not to mention the Vatican States or its holdings elsewhere. The Buddhist monasteries in China and Japan had issues with growing so large and powerful that they became major political and military players, leading to war and extirpation by other actors such as Oda Nobunaga. Any perpetuity which becomes equivalent to a large or small country will suffer the same mortality rates.
And then there’s opportunity cost. We have good reason to expect the upcoming centuries to be unusually risky compared to the past: even if you completely ignore new technological issues like nanotech or AI or global warming or biowarfare, we still suffer under a novel existential threat of thermonuclear warfare. This threat did not exist at any point before 1945, and systematically makes the future riskier than the past. Investing in a perpetuity, itself investing in ordinary commercial transactions, does little to help except possibly some generic economic externalities of increased growth (and no doubt there are economists who, pointing to current ultra-low interest rates and sluggish growth and ‘too much cash chasing safe investments’, would deprecate even this).
Compounding-wise, there are other forms of investment: investment into scientific knowledge, into more effective charity (surely saving peoples’ lives can have compounding effects into the distant future?), and so on.
So to recap:
organizational mortality is extremely high
financial mortality is likewise extremely high; and both organizational & financial mortality are relevant
all estimates of risk are systematically biased downwards, estimates indicating that one of these biases is very large
risks for organizations or finances increases with size
opportunity cost is completely ignored
Any of these except perhaps #3 could be sufficient to defeat perpetuities, and I think that combined, the case for perpetuities is completely non-existent.
Philip Trammel has criticized my comment here: https://philiptrammell.com/static/discounting_for_patient_philanthropists.pdf#page=33 He makes 3 points:
Perhaps the many failed philanthropies were not meant to be permanent?
First, they almost certainly were. Most philanthropies were clan or religious-based. Things like temples and monasteries are meant to be eternal as possible. What Buddhist monastery or Catholic cathedral was ever set up with the idea that it’d wind up everything in a century or two? What dedication of a golden tripod to the Oracle at Delphi was done with the idea that they’d be done with the whole silly paganism thing in half a millennium? What clan compound was created by a patriarch not hoping to be commemorated and his grave honored for generations without end? Donations were inalienable, and often made with stipulations like a mass being said for the donators’ soul once a year forever or the Second Coming, whichever happened first. How many funny traditions or legal requirements at Oxford or Cambridge, which survive due to a very unusual degree of institutional & property right continuity in England, came with expiration dates or entailments which expired? (None come to mind.) The Islamic world went so far as to legally remove any option of being temporary! To the extent that philanthropies are not encumbered today, it’s not for any lack of desire by philanthropists (as charities constantly complain & dream of ‘unrestricted’ funds), but legal systems refusing to enforce them via the dead hand doctrine, disruption of property rights, and creative destruction. My https://www.gwern.net/The-Narrowing-Circle is relevant, as is Fukuyama’s The Origins of Political Order, which makes clear what a completely absurd thing that is to suggest of places like Rome or China.
Second, even if they were not, most of them do not expire due to reaching scheduled expiration dates, showing that existing structures are inadequate even to the task of lasting just a little while. Trammel seems to believe there is some sort of silver bullet institutional structure that might allow a charity to accumulate wealth for centuries or millennia if only the founders purchased the 1000-year charity plan instead of cheaping out by buying the limited-warranty 100-year charity plan. But there isn’t.
His second point is, I’m not sure how to summarize it:
I can’t see how this point is relevant. Aside from his hypothetical not being the case (the organizational death statistics are certainly not based on any kind of fission like that), if a billion waqfs all manage to fail, that is a valid observation about the durability of waqfs. If they were split apart, then they all had separate managers/staff, separate tasks, separate endowments etc. There will be some correlation, and this will affect, say, confidence intervals—but the percentage is what it is.
His third point argues that the risk needs to grow with size for perpetuities to be bad ideas.
This doesn’t seem right either. I gave many reasons quite aside from that against perpetuities, and his arguments against the very plausible increasing of risk aren’t great either (pogroms vs the expropriation of the Church? but how can that be comparable when by definition the net worth of the poor is near-zero?).
I’d say there’s more than enough when you don’t handwave away millennia of examples.
Incidentally, I ran into another failure of long-term trusts recently: Wellington R. Burt’s estate trustees managed to, over almost a century of investment in the USA during possibly the greatest sustained total economic growth in all of human history, with only minor disbursements and some minor legal defeats, no scandals or expropriation or anything, nevertheless realize a real total return of around −75% (turning the then-inflation-adjusted equivalent of ~$400m into ~$100m).
Hi gwern, thanks for the reply.
I think you might be misunderstanding my points here. In particular, regarding point 2, I’m not suggesting that the waqfs split, or that anything at all like that might have happened. The “split waqfs” point is just meant to illustrate the fact that, when waqf failures are correlated for whatever reason, arbitrarily many closures with zero long-term survivors can be compatible with a relatively low annual hazard rate. The failure of a billion waqfs would be a valid observation, but it would be an observation compatible with the belief that the probability that a new waqf survives a millennium is non-negligible.
In any event—I should probably have reached out to you sooner, sorry about that! Now unfortunately I’ll be too busy to discuss this more until June, but let me know if you’re interested in going over all three points (and anything else regarding the value of long-term philanthropic investment) once summer comes. I would sincerely like to understand the source of our disagreements on this.
In the meantime, thanks for the Wellington R. Burt example, I’ll check it out!
The premises in this argument aren’t strong enough to support conclusions like that. Expropriation risks have declined strikingly, particularly in advanced societies, and it’s easy enough to describe scenarios in which the annual risk of expropriation falls to extremely low levels, e.g. a stable world government run by patient immortals, or with an automated legal system designed for ultra-stability.
ETA: Weitzman on uncertainty about discount/expropriation rates.
Sure. But the support for other parts of the perpetuity argument like long-term real returns aren’t strong either. And a better model would take into account diseconomies of scale. Improbability needs to work both ways, or else you’re just setting up Pascalian wagers…
They have?
Even easier to describe scenarios in which the risk spikes. How’s the Middle East doing lately? Are the various nuclear powers like Russia and North Korea still on friendly terms with everyone, and nuclear war utterly unthinkable?
This seems to be purely theoretical modeling which does not address my many disjunctive & empirical arguments above against the perpetuity strategy.
I see no reasons to conclude that. Au contraire, I see expropriation risks rising as the government power grows and the political need to keep the feeding trough full becomes difficult to satisfy.
“Easy to describe” is not at all the same thing as “Are likely”. Both utopias and dystopias are easy to describe.
I stand corrected.
Thank you Gwern.