It’s a truism in the efficient charity community that when giving to charity, we should find the most efficient group and give it our entire charity budget; the common practice of spreading donations among groups is suboptimal. However, in investing it’s considered a good idea to diversify. But it seems that giving to charity and investing are essentially the same activity: we are trying to get the highest return possible, the only difference is who gets it. So why is diversification a good idea for one and not the other?
If you are attempting to maximise expected returns from your personal investment you would not diversify (except within resources that have identical expected returns). However with personal investments you have some degree of risk aversion. That is, you don’t value money linearly all the way from 0 to $10,000,000 and so splitting the investment between multiple stocks gives higher expected utility even though the expected returns in $ will be slightly lower.
This differs when it comes to charitable giving because it is assumed that your personal donations aren’t sufficient to change the marginal utility significantly. Personally owning $10,000 rather than $0 is much more useful than owning $20,000 instead of $10,000 but after you give $10,000 to The Society For Cute Puppies And Mosquito Nets the value of giving another $10,000 to TSFCPaMN has probably barely changed at all. Diversifying becomes important again when you have enough financial power to change the margin all on your own.
If you are attempting to maximise expected returns from your personal investment you would not diversify (except within resources that have identical expected returns). However with personal investments you have some degree of risk aversion. That is, you don’t value money linearly all the way from 0 to $10,000,000 and so splitting the investment between multiple stocks gives higher expected utility even though the expected returns in $ will be slightly lower.
This differs when it comes to charitable giving because it is assumed that your personal donations aren’t sufficient to change the marginal utility significantly. Personally owning $10,000 rather than $0 is much more useful than owning $20,000 instead of $10,000 but after you give $10,000 to The Society For Cute Puppies And Mosquito Nets the value of giving another $10,000 to TSFCPaMN has probably barely changed at all. Diversifying becomes important again when you have enough financial power to change the margin all on your own.