Here is my New York Times column today. The focus is on how we often make bad charitable decisions. Excerpt:
…before we can improve our charity, we must first understand it. John A. List, an economist at the University of Chicago,
is studying fund-raising campaigns toward this end. Professor List,
combining his career as a researcher with a role as part-time
consultant, introduces variations into real world fund-raising
campaigns and studies the results. This reflects his core method of the
"field experiment," which he has applied to topics as diverse as
competition between the genders, how contestants cooperate on
television game shows and how markets work in baseball card trading.
Steven D. Levitt, co-author of "Freakonomics" and a colleague at the
University of Chicago, refers to Professor List as the young economist
most likely to win a Nobel Prize.
Here is another bit:
For purposes of contrast, Professor List and his team then increased
the attractiveness of the woman who asked for the money. The more
attractive women (a "one standard deviation increase in
attractiveness," in statistical terms) had as big a positive impact on
giving – in the range of 50 to 100 percent – as moving from the least
successful fund-raising method to the most successful.
Seems clear to me that government should take over the charity business.
How did these five guys measure a one standard deviation in attractiveness of females?
Seems pretty straightforward. Have a big bunch of guys rate pictures of women- from 1
to 10- on attractiveness. Get the mean for each woman- that is her “attractiveness”.
Calculate the variance across the entire set of women. You now have the standard deviation.
“Without giving very large contributions, a contributor will not be rewarded with a sense that the donation has furthered the contributor’s purposes.”
How could you know that?
Keep in mind that this is only talking about small donations. Donors who give substantially give because they feel invested in the project, and care about it. Feeling ‘good’ about themselves is FAR down the list.
To quote: “The philanthropic sector is showing a growing awareness of these sorts of institutional failures, so initiatives are under way to improve their performance. The Robin Hood Foundation in New York City pledges that its board will cover all overhead expenses; remaining donations go to antipoverty programs. The charity College Summit raised $15 million by going to Wall Street with a plan for growth and fund-raising, much as a venture capitalist might do. Geneva Global encourages donors to think of themselves as investors; it measures and reports results for each of its programs.” This entire article was simply a way to plug applying these approaches (or mindset) to funding in the nonprofit sector. There is no data that any of these approaches actually help the nonprofits (which actually do the work) more effectively carry out their missions. It’s anecdotal. Many of the trumpeted “new” approaches have been around for decades and are now being marketed as venture philanthropy (by the way, a term that one of the Rockefeller’s used in the 60′s to describe their approach to giving). Sometimes having Jack Welch come in and centralize the NYC school system works; sometimes it’s just interference and it must be undone (see recent press). After all, how do you “solve” the problem of poverty? How do you measure success when treating alcoholism (why does a “ROI” even apply)? Moreover, why would a donor who is not expert in a subject know better than people with specialized training? This doesn’t mean that not-for-profits shouldn’t evaluate results, and good ones are smart about what is measurable and what just increases administrative overhead. I’m very glad that there are new voices coming to the table that think they are discovering new ways to give. But a little modesty would make many more allies in the sector and thereby further the author’s aims. (Also, what does it mean to have no overhead? Why is that such a good thing? Why should people be encouraged that work is for free? How is rent paid for? Who is hired to input all the data into the smart new spreadsheet that will help turn schizophrenic homeless vets into the hedge fund managers?)
It seems to me that one of the reasons donors fail to investigate whether their charitable dollar is being spent wisely is because of the considerable costs in obtaining information on a given charity. Put simply, the search cost is too great.
To encourage greater efficiency in the charitable sector, we need mandatory, uniform disclose and annual reports, very similar to that required of the private sector (and indeed the prospectus, referred to in the title).
Mandatory reporting of the outcomes of charitable work will add a small cost to the organisation in order to gather the information, but will have significant benefits for the efficiency of the sector by allowing donors to know which charities do their job effectively and which ones don’t.
Without trying to justify their donors’ behavior, there may be some good explanations. Over half of all charitable gifts to to religious organizations and schools – typically, the donors’ own congregations, alma maters or schools for their children – and most other gifts go to organizations with whom donors have had some experience or contact. In most cases, donors likely feel they have enough information about the organizations to make a decision. We might find most people who buy stock have a similar level of knowledge about the companies in which they invest. Finally, even the most financially sophisticated donors apparently make large gifts without trying to quantify the effectiveness of the charities they support – as reported in “Why Measure?,† in the Stanford Social Innovation Review in Summer 2004 (http://www.ssireview.org/articles/entry/why_measure/), a study of major donors of over $50,000 found that information about performance measures did not influence their decisions to give, and in fact, they were skeptical about the feasibility of getting reliability information on outcomes.
Ari’s post about the need to bring down search costs is correct. In fact, whether nonprofits really are making a difference is exactly the right question everyone who cares about private action for public good should ask. Unfortunately, it’s a very difficult question to answer. I think it’s likely that the cost of reducing the search costs is not something anyone wants to pay. Assessing the value of a charitable organization’s work is difficult because it involves so many intangibles. (Anyone interested in the difficulties of quantifying outcomes may want to look at what the evolution of the Roberts Enterprise Development Fund’s efforts to calculate the “social return on investment† of its grants, at http://www.redf.org.) The for-profit world is supported by a billion dollar industry dedicated to providing information to investors, a universe of outside analysts dedicated to calculating value, serving a large market of investors and institutions willing to pay for that information. And still, there is no shortage of bad investment decisions and wasted resources, and many commentators lament the sometimes distortive effect that pressure to “make the numbers† causes. The nonprofit world has no equivalent analysis infrastructure, unfortunately (maybe in large part because either no one wants to pay for that analysis, or perhaps, people conclude rationally that the cost of deriving that information exceeds the benefit). I wouldn’t expect much from the rating systems or from Guidestar; they’re such blunt instruments. So the burden of proving value falls on each nonprofit organization itself, where the need to measure performance must compete with other pressing needs for a share of inadequate resources.
One final key point: In contrast to grant making by individuals, institutional funders such as private foundations, corporations and government agencies, typically require much more information and paperwork from grantees than the size of their grant should require. The cash crunch and administrative burden that come with government contracts, in particular, are perennial issues in the nonprofit world. While reducing these transactional costs would be a long shot, doing so would unlock a huge reserve of energy for nonprofits to direct toward meeting their missions. This is a subject for another series of articles entirely.
I sent a letter to the editor making similar points, but it probably won’t be published, and then a few days later I found this blog. I was very hesitant to post here, since I’m not an economics expert, but the nonprofit world really needs help solving the challenge of proving value from the best people.
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Anna is right.I guess people will still make donations just to help other people.It won’t matter if they know or not the hidden things behind the charity. donate car to charity
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