Modifying Endowment Spending Rules: Is It the Cure for Overspending?

In this article we analyze the dynamics of endowment spending and real endowment values using rules that tie endowment spending to inflation. Numerical examples demonstrate that under a pure inflation rule, spending rates tend to drift away over time from the appropriate rate, leading to either rising or falling real endowment values. Under a banded rule, the drift is limited by the upper and lower limits of the band, but spending rates tend to get stuck at these limits, again leading to volatility in real endowments. The Yale-Stanford mixed rule, a rule based on both asset values and inflation, avoids these difficulties. Monte Carlo simulations confirm our analysis in the case of uncertain and volatile asset returns.