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Should we diversify our charitable giving?
Citing Steve Landsburg, Tim Harford argues:
Someone with $100 to give away and a world full of worthy causes should choose the worthiest and write the check. We don't. Instead, we give $5 for a LiveStrong bracelet, pledge $25 to Save the Children, another $25 to AIDS research, and so on. But $25 is not going to find a cure for AIDS. Either it's the best cause and deserves the entire $100, or it's not and some other cause does. The scattershot approach simply proves that we're more interested in feeling good than doing good.
Many people are unconvinced by this argument—which I owe to Steven Landsburg—because they are used to diversifying their financial investments (a bit of Google stock and a bit of Exxon, too) and varying their choices (vanilla ice cream AND bananas). But those instincts are selfish: They are not intended to benefit both Google and Exxon, nor both the ice-cream company and the banana growers. With charity, the logic is different, and a truly selfless donor would bite the bullet and put his entire donation behind one cause. That we find that so hard to imagine is just one more indication of how hard it is for us to think ourselves into a truly selfless view of the world.
We can think of charitable projects, at least in ex ante terms, as aligned along a continuum of expected returns. The highest-return project is just a wee bit better than the runner-up candidate. In that setting, it is hard, as always, to evaluate the efficiency consequences of differing distributions of wealth. But in a Rawlsian sense -- what would a poor person want if he did not know which group he would end up assigned to? -- the poor would prefer that any particular gift is diversified. Even if the dollar rate of return falls by a small amount, the insurance value of that giving rises.
Keep in mind that a single donation is itself supporting a bundle of projects, not a single giving opportunity. (What would a truly specialized donation look like?)
I agree with Harford's point in a different regard. The fixed costs of processing a donation are relatively high, if only because the charity will send further letters asking for more money. For that reason it may be better to focus our giving on a single charity.
Posted by Tyler Cowen on October 16, 2006 at 07:48 AM in Economics | Permalink
Comments
A rational investor with $100 to invest in a world full of worthy investments
diversifies rather than betting it all on one investment. Why shouldn't the
same thing be true with giving to charity? How would a donor know which charity
is the worthiest? Should the Gates Foundation invest all its money in one
cause?
Posted by: Bill Stepp at Oct 16, 2006 8:16:30 AM
Indeed, you can model the 'rational charity giver' by pretending that he is playing a game where the points are awarded for doing the most good. Since like the rational investor he is ignorant of all relevant information he diversifies to reduce risk. Maybe finding a cure for AIDS is the most worthy goal but can he be 100% sure the AIDS research foundation isn't a scam? If it is tand he put all his money into it then his charity has been wasted. If he diversifies then he still has a shoot at doing good.
Posted by: Boonton at Oct 16, 2006 9:36:08 AM
The Gates Foundation is in a TOTALLY different category from someone with $100 because the marginal benefit of the hundred millionth dollar for the recipients of a given charity is usually substantially lower than that of the ten millionth dollar. The marginal benefit of the hundredth dollar is essentially never lower than that of the tenth.
The Rawlesian argument only holds that we should only invest in those charities that help the poorest poor (with due attention to the macro effects). That and hedonics research make me think that Operation Smile or Smile Train are good choices, as, of course, is microcredit. The Rawlesian argument does NOT hold that we should diversify our charitable giving because the charities that we give to will give constant sized chunks of aid in any event, they will simply give more units of this aid with more money, increasing the likelihood that a given member of the poorest poor will recieve aid.
For a rational agent, there is NO purely altruistic argument for diversification of small funds. However, there may be such an argument for a human. Much of the actual reason for giving to charity is that the person is purchasing an identity. Purchasing diverse charitable goods may, for some people, lead them to acquire more of the identity product than purchasing more of fewer goods, and a more giving identity may enable the person to give more total than they would otherwise actually give.
Posted by: michael vassar at Oct 16, 2006 9:36:17 AM
Unfortunately even if you only give to one charity it's almost certain that your name will be shared with/sold to other somewhat similar charities and they will all send you endless letters asking for money. I suppose that's what they must do to get any money at all and it must, over all, be a positive number but it's quite hard for me to believe that not only have the charities that I have (for various reasons) never donated to wasted a lot of money (and annoyed me) by sending me endless requests for money but even those to whom I have donated modest sums have long since spent more than the amount I gave asking for me.
Posted by: Matt at Oct 16, 2006 9:50:17 AM
Michael Vasser completely misses the point I was making, which is that
both "rational" investors and "rational" donors diversify. The sums
are irrelevant (although someone with only $100 to invest would likely
put it into a money market fund, which is a diversified mutual fund invested
in fixed-income assets).
The Rawlesian argument is irrelevant and anytime I see his name invoked I
know I'm in for a hornswoggling. Why are the poor worthier than the
non-poor? Rawles gave no good reason.
There is also no such thing as altruism, pace Rand and biologists, because
all action is self-interested, including giving to charity.
Posted by: Bill Stepp at Oct 16, 2006 10:24:04 AM
The entire proposition is extremely tricky. Landsburg, in his column, suggests that the donation must be small relative to the size of the charity for the result to hold. This is wrong. But what is the correct condition?
Posted by: Tyler Cowen at Oct 16, 2006 10:31:40 AM
The best argument for multiple donations, as I see it, is that the political and moral strength of some charitable organizations depends on how many members they can say they have, so you might want to let multiple organizations be able to claim you as a member.
Posted by: David J. Balan at Oct 16, 2006 10:35:31 AM
Investor diversification and portfolio theory are based on an assumption that investors are risk averse: the utility cost of losing your shirt is greater than the utility benefit of moderately higher returns. But why should a rational altruist be risk-averse, rather than maximizing expected benefit to others?
If you give in order to impress your neighbours, then you may want a diverse set of charities. This ensures that you will have a socially salient charity for every occasion (bring out the Cato donation in a libertarian crowd, the Red shirt with your public health friends, etc) and will not be embarassed about only supporting a failed effort.
I don't buy the argument that diversifying an individual donation provides additional insurance benefits, agreeing with Michael Vassar that the same effect is derived from producing more units of a given type of aid, e.g. providing antimalarial drugs to 1000 people instead of 100.
Posted by: Carl Shulman at Oct 16, 2006 10:49:41 AM
Following up on David Balan's point about discontinuous returns, there are a wide variety of 'challenge grants' floating around, some of them with caps. Picking up 'free money' in this fashion, or by playing with employer donation-matching programs may justify diversified giving.
Posted by: Carl Shulman at Oct 16, 2006 10:54:33 AM
Isn't the main problem that donors do not have reliable information about how efficient most charities are? There aren't too many rating systems in place to tell us which charity uses their money best. Thus giving to many charities lowers the risk that you will waste your money completely. Just a thought!
Posted by: saint-exupery at Oct 16, 2006 10:56:45 AM
Transaction costs, as Tyler alludes to, are also important for small donations. It ultimately my cost a charity $1-$10 to process a donation, whether it is a $100 or $1000 donation. If you split your donation among many charities, you are already increasing the total transaction costs and reducing the efficiency of your donation.
To put it another way, a ration investor with $100 will *not* diversify if it costs $19.99 to get into each asset class.
Posted by: mobile at Oct 16, 2006 11:11:20 AM
I hardly see what the argument here is even supposed to be,
other than the wildly implausible assumptions that a) there is
a unidimensional scale of "worthiness" and b) donors are
justifiably confident of their ability to assess which charity
is the "most worthy."
In the case of the most morally urgent needs, e.g. emergency
relief, public health, and development aid in the poorest
countries, I'm *extremely* unconfident of my ability to assess
which charities do the most good or even which charities do much
good at all. If I want to be pretty sure that I'm contributing
to those needs at all, I need to diversify across, e.g., Oxfam,
MSF, Red Cross, and so on.
In the case of needs that are closer to home and about which
I'm more certain which organization(s) pursue them how well,
the dimensions seem to multiply. Is IJ more "worthy" than Cato?
What does the question mean? I want them both to exist and to
thrive; they both improve the world.
This doesn't address the transaction-cost-per-small-donation
concern. But Harford places weight instead on the "give
everything to the worthiest charity" claim, and that just seems
to me untrue to the goods people try to (altruistically) promote
with their charitable giving.
Posted by: Jacob T. Levy at Oct 16, 2006 11:27:03 AM
Conpetitive Altruism
One of my colleagues - Gilbert Roberts - may have suggested part of the reason for scattershot donations: competitive altruism -
http://www.staff.ncl.ac.uk/gilbert.roberts/Roberts1998.pdf
The idea is that altruism, including charity giving, can function as a signal of fitness ('I have enough and to spare') which is sexually attractive.
Posted by: Bruce G Charlton at Oct 16, 2006 11:50:12 AM
"With charity, the logic is different, and a truly selfless donor would bite the bullet and put his entire donation behind one cause."
But who believes that people are truly selfless donors? I suspect that a majority of donors (a large majority, in my mind) donate to make themselves feel good). I also suspect that how good one feels is not strongly correlated with the amount one donates. Thus, many people will always vary their donations (and keep individual donations small-ish) for precisely the same reasons that people vary other choices and don't eat one gallon of ice cream at one time.
-Kevin
Posted by: Kevin Postlewaite at Oct 16, 2006 1:08:59 PM
Kevin,
If people give in order to feel good about themselves, then presumably awareness of the argument against diversification should change the ability of different types of donation to make them feel good. I would feel like an idiot giving $100 to a charity that provided stuffed animals for Katrina victims, or supporting live ballet or opera performances for the rich, because I know that same money could buy deworming medicines or mosquito nets to save the lives of multiple African children. (Incidentally, I follow the 100% concentration model in my charitable contributions.) There is such an enormous variation in the utilitarian impact of different charities (orders of magnitude), that reallocation of contributions from ineffective to comparatively effective charities is likely to outweigh any reduction in total giving.
Posted by: Carl Shulman at Oct 16, 2006 1:34:16 PM
OK, you've convinced me, the Mercatus Center is getting all my charity money this year. :)
Posted by: Jacqueline at Oct 16, 2006 1:45:01 PM
Tyler asked what a truly specialized or specific donation would look like. The answer can be seen on www.globalgiving.org . We have created a system for people to give directly (with the least possible intermediation) to specific projects, mostly in the developing world. We charge a flat 10% for processing costs, and even when transfer fees are included, we can usually get at least 87% of the money directly to the project. The site has information on each project, including the people running it and the expected outcomes. Project leaders are given incentives to post progress reports because their projects appear more prominently on the page if they do. We just introduced a feedback mechanism that allows users to provide feedback on the progress reports. This is only the first step in a more robust feedback system that will distribute the monitoring and evaluation function, and enable projects to get new ideas from anyone in the world. The goal is to enable grassroots groups to build a track record (brand, reputation....) and help the cream of the projects to rise to the top.
Posted by: Dennis Whittle at Oct 16, 2006 2:11:00 PM
Saint-exupery has a great point. Charities are not that transparent and their actions are not instantly effective. Just like investments, we don't *really* know what kind of a return we will get. So, we diversify. Seems logical.
Posted by: asparagus at Oct 16, 2006 2:12:37 PM
Jacqueline,
The Mercatus Center is actually a pretty good charity: their operating costs are small, but stopping an onerous regulation can produce societal benefits in the hundreds of millions or billions of dollars. On this point, I agree with Matt Yglesias, who thinks that people interested in a cause will get more bang-for-the-buck by trying to influence other actors (such as governments, corporations, and wealthy individuals) through idea production than by acting directly. I target my own giving towards the Singularity Institute for Artificial Intelligence http://www.singinst.org/ on this theory (and because the area in which it operates is tremendously underfunded relative to potential gains and losses that dwarf even those associated with issues like HIV or malaria).
The piece below notes another practical reason not to diversify, namely that charities are reluctant to sell the contact information of large donors (who they wish to hoard), but will sell the info of small donors, whose donations are largely consumed by transaction costs.
http://www.charitynavigator.org/index.cfm/bay/content.view/catid/68/cpid/254.htm
Posted by: Carl Shulman at Oct 16, 2006 2:57:26 PM
The diversification argument is not relevant to a selfless "investor" making a small donation. It would be relevant to the social planner directing others' donations, but not to a selfless individual who is not Bill&Melinda Gates.
The case for diversification is purely selfish. Being that, I diversify.
Posted by: Gerard MacDonelll at Oct 16, 2006 3:03:29 PM
There are numerous smart comments here, but none of you have solved for the right answer. The general problem is which risks should count in which contexts. Kenneth Arrow, in a different context, got the problem wrong, so it is tough.
Posted by: Tyler Cowen at Oct 16, 2006 3:05:12 PM
Asparagus,
But why do we care about uncertainty if we are trying to maximize the expected value of our contribution? Suppose that you could give a charity either $1000 in cash, or a bet on a roulette wheel with a 1-in-38 chance of winning $50,000 and a 37/38 chance of winning nothing. I would give the roulette bet because it maximizes the expected dollar value of the gift. On the other hand, when you invest you are trying to maximize expected utility, and money has diminishing marginal returns: if you lose everything that is VERY BAD, while getting unusually high returns will not be correspondingly good. Thus, you are risk-averse and diversify. Institutions like hedge funds and insurance companies are comparatively risk-neutral, and make money by holding investments accordingly.
I would argue that when giving charitable contributions you should be like the hedge fund and not the low net worth individual investor. If you are selfless, then donating $20,000 to the optimal charity is 20,000 times as good as donating $1 (assuming the charity's total resources are large enough that you are not changing its marginal return on spending), e.g. expected utility tracks exactly with expected value. You seem to be concerned with minimizing the chances that you give nothing to the optimal charity, but why is it so bad to take a risk that provides the best expected benefit to humanity and get snake eyes? The optimal charity keeps operating if it doesn't get your small contribution, so it's not like the personal investment case where you can lose your shirt.
Of course, if you are giving millions of dollars this may no longer apply, because your donations may be large enough to push an organization to the point of diminishing returns, but Landsburg specifies that condition.
Posted by: Carl Shulman at Oct 16, 2006 3:15:30 PM
Doesn't this just show that charitable giving, like tipping, primarily is for the benefit of the giver (or tipper). We are advertising to others and to ourselves that we are good, generous people. The returns are measured in our increased sense of self-worth and in the increase in esteem we are held in by our peer group.
This is just normal human behavior, we are constantly jostling for increased social stature, and there are many thinly veiled reasons we have for justifying our behavior. Fashion, car purchases, travel, hobbies, charity, voting, etc, etc.
I'm exaggerating with the use of the term "primarily", but a scrambling for social status is a large part of almost everything people do. It's not good or bad, it's just human nature.
Posted by: mike at Oct 16, 2006 3:35:11 PM
I'm surprised noone has raised the point Tyler mentioned in a much earlier post (sorry couldn't find the link):
[I surmise from memory]: To produce the best 'return' on your charity 'investment' one should select the most worthy *unfashionable* charity.
i.e. (for example) if orphanages & donkey sanctuaries will tug the heartstrings of the average person, then that will be at the expense of a less 'fashionable' but potentially equally worthy cause; therefore the dispassionate rational giver will avoid these & give to a neglected but worthy cause.
Basically the point I took from the earlier post is that one should consider where everyone else's charity is going before electing to give to one or many causes.
In economic terms, this is because your 100 dollars is not just split into 100 marginal dollars from you, but because your 100 dollars is the world's marginal 100 charity dollars at the moment you chose to give.
Posted by: nick at Oct 16, 2006 3:52:09 PM
Further to Carl Shulman's post about the roulette wheel ... should I give $10 to fight malaria, or should I give $10 to an organization -- say, the Cato Institute -- that promotes liberty and free markets? The first way, I am likely to prevent one case of malaria. The second way, perhaps I have one chance in a million that my donation will help tens of millions of people get rich enough to eliminate malaria forever.
What is the marginal benefit of my $10 to Cato's cause? Is it more or less than the marginal benefit of the $10 sent to fight malaria now? And if it's more, is it still a good idea?
Posted by: Phil at Oct 16, 2006 4:04:52 PM
