Does anyone give money to charity efficiently?

by on April 7, 2013 at 4:11 am in Economics, Education, Philosophy | Permalink

Scott Alexander meets up with Robin Hanson and reports from the front:

Then Robin Hanson of Overcoming Bias got up and just started Robin Hansonning at everybody.

…One of his claims that generated the most controversy was that instead of donating money to charity, you should invest the money at compound interest, then donate it to charity later after your investment has paid off – preferably just before you die, since donating money after death is legally complicated. His argument, nice and simple, was that the real rate of return on investment has been higher than the growth rate for 3000 years and this pattern shows no signs of changing. If you donate the money today, your donation grows with the growth rate, but if you invest it, it grows with the interest rate. He gave his classic example of Benjamin Franklin, who put his relatively meager earnings into a trust fund to be paid out two hundred years later; when they did, the money had grown to $7 million. He said that the reason people didn’t do this was that they wanted the social benefits of having given money away, which are unavailable if you wait until just before you die to do so.

…Then he started talking about how you should only ever donate to one charity – the most effective. I’d heard this one before and even written essays speaking in favor of it, but it’s always been very hard for me and I’ve always chickened out. What Robin added was, once again, a psychological argument – that the reason this is so hard is that if charity is showing that you care, you want to show that you care about a lot of different things. Only donating to one charity robs you of opportunities to feel good when the many targets of your largesse come up and burdens you with scope insensitivity (my guess is that most people would feel more positive affect about someone who saved a thousand dogs and one cat than someone who saved two thousand dogs. The first person saved two things, the second person only saved one.) In retrospect this is absolutely true and my gibbering recoil at this problem isn’t just Yet Another Cognitive Bias but just good old self-interest.

The post is interesting throughout, and the hat tip goes to Geoffrey Miller, @MatingMind.

Alistair Cunningham April 7, 2013 at 4:19 am

How about giving to one’s favourite charity, with the stipulation that they invest the donation for at least N years before spending it? The ‘at least’ is important so that they have the flexibility to cash out at a high point in the economic cycle.

prior_approval April 7, 2013 at 4:23 am

‘…preferably just before you die, since donating money after death is legally complicated.’

At least one center (sadly, I can’t actually link to the text) says this –

‘It is possible to make the Mercatus Center a beneficiary of your estate through your will. If you are making a new will, you can simply include Mercatus among the beneficiaries of your estate. If you already have a will, you can add Mercatus as a beneficiary of your estate through a codicil.

When making Mercatus a beneficiary of your will, you have several options. You could specify a specific amount of your estate to be given to Mercatus, a percentage of your estate, a residual or “what’s left” of your estate after providing for your loved ones, or a particular asset that you believe will be useful to us. If your estate is subject to estate taxes, a bequest to Mercatus in your will can be deducted from your estate and can result in significant tax savings.

If you choose to make this gift, it is important to name the beneficiary as the Mercatus Center and to include our address: 3351 Fairfax Drive, 4th Floor, Arlington, VA 22201.

Sample Bequest Language:

I give, devise, and bequest to the Mercatus Center, #54-1436224 tax identification number; 3351 N. Fairfax Drive, 4th floor; Arlington, Virginia 22201 (insert amount, percentage, nature of gift or remainder of estate) to be used at the discretion of the Directors of the Mercatus Center(or designated purpose).’

Seems remarkably uncomplicated, actually.

derek April 7, 2013 at 11:21 am

Then you die, someone has to be executor, legal niceties all fulfilled with costs.

When you are alive, you just write a check.

prior_approval April 7, 2013 at 12:12 pm

And yet, the Mercatus Center instructions seem to feel that the legal costs (to the extent they exist) are just the normal cost of administering a will, and pretty much meaningless in this context.

ShouldBeWorkingOnMyThesis April 7, 2013 at 1:08 pm

I think the question is if you’re looking to do it most efficiently, those transactions costs can eat into the profits you made by investment.

TMC April 7, 2013 at 2:54 pm
david April 7, 2013 at 4:27 am

The response to both lines of attack is that neither takes into account risk aversion in how the donations will be used. Risk aversion is what drives diversification over pure expected return, after all.

Rahul April 7, 2013 at 4:37 am

Then he started talking about how you should only ever donate to one charity – the most effective.

I never got that argument. It’s like saying, “one should only invest in one stock; the one with highest return”

Portfolio diversification is a rational response to not knowing which one charity is the most effective.

prior_approval April 7, 2013 at 5:18 am

Or donate to the charities that do work in the areas that concern one – but binary thinking is one of those things some people seem incapable of actually recognizing.

To give a concrete example from one man’s life –

http://en.wikipedia.org/wiki/Carnegie_library

http://en.wikipedia.org/wiki/Carnegie_Endowment_for_International_Peace

http://en.wikipedia.org/wiki/Carnegie_Council_for_Ethics_in_International_Affairs

http://en.wikipedia.org/wiki/Carnegie_Mellon_University

ShardPhoenix April 7, 2013 at 5:29 am

Presumably you’re going to be less risk-averse to the result of your donations than to the result of your investments – even if it turns out that you donated wrongly, the “correct” charities will still have been funded, just slightly less. It may be an issue if you’re a billionaire.

David O April 7, 2013 at 4:55 am

Yes, but only among charities that lie upon the charitable equivalent of the efficient frontier. Givewell notwithstanding, accountability mechanisms in charitable giving are not nearly efficient enough to allow one to assume they all lie along the efficient frontier.

David O April 7, 2013 at 4:56 am

(Meant to be directed at Rahul above).

Rahul April 7, 2013 at 5:37 am

Isn’t that a stronger case for diversification? We don’t have a good way to know which ones are really effective.

Worthing April 7, 2013 at 6:21 am

Rahul, would you mind sharing if you are an alumni of Delhi School of Economics or Indian Statistical Institute?

(Just asking out of curiosity as your grasp of economics is very impressive, and I believe these two are the top places in India to study economics.)

Rahul April 7, 2013 at 2:35 pm

Nope. I’m an Engineer.

Yeah, those two are good schools though.

David O April 7, 2013 at 8:36 am

It is legitimate to diversify to the extent that knowledge is lacking. But there are charities with clearly superior outcomes to others, as GiveWell has pretty conclusively demonstrated. Just as you would never pick a share that you *knew* would have both lower return and higher risk than another, you would never give to certain charities over others.

Rahul April 7, 2013 at 2:40 pm

I agree mostly but yet:

(1) Even the set of AAA+ charities is probably fairly large

(2) Givewell has surveyed a pretty small cohort of all possible charities out there

(3) Part of diversification may be motivated by our distrust of GiveWell and any similar rating schemes.

Pub Editor April 9, 2013 at 12:20 am

+1 to everything Rahul said. Also, giving in installments over several years allows the giver to calibrate and gauge the efficiency/effectiveness of a charity over time. There is no guarantee that a charity that looks especially good today will look the same next year, or ten years from now.

Willitts April 7, 2013 at 11:57 am

Do the most effective charities maintain their effectiveness as their donations grow in response to Hansonian wisdom? I think not.

Aside from that, the marginal benefit a single charity gets from a donation is declining. There are a large number of admissible projects and coordinating donations to the few “most effective” isn’t necessarily the most bang for the bucks.

As public goods, charities are already underfunded by free riding. If everyone or a large number of people took Hanson’s advice, many worthy charities would go underfunded for decades. There are transition costs to this possible optimum.

There are tax advantages to the current form of charitable giving, and as a private wealth manager I can tell you that matters quite a bit. And the legal costs are highly overstated by Hanson; we earn our pay making it as costless as possible for people to leave bequests to foundations, endowments, and charities.

And non-profits are notoriously corrupt and inefficient. They get away with it because there has rarely been an effective focus on non-profit accounting and transparency. Whatever gauge of effectiveness you use is likely to be off.

Saturos April 7, 2013 at 5:52 am

2 main issues with waiting to give:
Need precommitment to prevent chickening out at end and spending on friends/relatives/own life extension
Intended recipients may not still be poor-needy/may not be able to work out the best charity at that time once 100yrs old/future people will live in an unquantifiably richer world, not clear whether there is as much utility gain as with present people

Main issue with all money to top charity: Suppose I pick GiveWell’s No.1 ranked charity Against Malaria, and have $10 million to give, is the 10th million still optimally allocated to them? (marginal benefits) What if a bunch of others do that too, after reading this post – what if my behavior influences them, what are the game-theoretics of that?

Margin April 7, 2013 at 12:03 pm

“future people will live in an unquantifiably richer world, not clear whether there is as much utility gain as with present people”

Assuming property rights are preserved, it will plausibly be higher because of technological empowerment to do more good.

This is true for any definition of “good” that can be optimized or aided by technology, e.g. human lives, longevity, pleasure, happiness, sociality, individual choice etc.

This could include speculative enhancement or reproductive technologies.

Generally speaking, if a “good” can be defined, it can be optimized using the scientific method.

Arguably, future dollars can do this better than current dollars because the relevant scientific knowledge may exist in the future.

Millian April 7, 2013 at 6:12 am

“If you donate the money today, your donation grows with the growth rate.” I don’t understand the reasoning here.

As for the social benefits of giving, it doesn’t matter if efficiency per euro/dollar suffers somewhat, as long as these generate more charity overall.

Saturos April 7, 2013 at 6:19 am

Oops, I see GiveWell already have this post: http://blog.givewell.org/2012/11/26/our-top-charities-for-the-2012-giving-season/

But I can’t find where they evaluate the effectiveness of donating to GiveWell itself… When GiveWell draws on its own funding, how much of that goes to Against Malaria? Or how do the top-level members allocate their own finances between helping AM and GW?

Bob Knaus April 7, 2013 at 7:30 am

It’s been two millenia since a Jewish carpenter suggested that true charity consists of foregoing the signalling benefit — “Give in secret” were his words. Not that many have followed his advice…

Roy April 7, 2013 at 12:07 pm

The Salvation Army does very well out of those kettles and bell ringers. That is pretty close to giving in secret.

Cyrus April 7, 2013 at 10:43 pm

If some followed that tenet, how would you know?

andrew fischer lees April 8, 2013 at 11:58 pm

well, it’s easy to tell when people aren’t following it

Rich Berger April 7, 2013 at 8:06 am

I suspect that there’s more of that than you know, for obvious reasons.

Robert Dammers April 7, 2013 at 8:24 am

This rather ignores the possibility that the value of the charitable action might lie in its being carried out now – and not at some future time when, in aggregate, everyone will be more prosperous (and thus able to contribute to charity). Once the recipient is dead, the efficacy of the giving is not of value to them.

liberalarts April 7, 2013 at 8:37 am

This is the best argument against a Ben Franklin style approach. Most recipients of charity have discount rates that exceed those of the giver, but suffer liquidity constraints. Market interest rates tend to be closer to the discount rates of those with liquidity.

Derek I April 7, 2013 at 9:15 am

Help one person today or save up for a decade and help two; what is the correct choice? The only argument I see is that eventually you need to pull the trigger, so now is a good time as any.

John April 7, 2013 at 10:51 am

Or, help one person now and then two people can help another tomorrow. Of course this depends on the type of aid provided. Above I’m thinking of aid in terms of “give and man a fish you feed him for a day, teach him to fish and you feed him for a lifetime” but suspect a lot of charitable aid is giving out fish not teaching someone how to fish.

John April 7, 2013 at 10:55 am

Or help one person today and both of you helps someone else tomorrow.

Of course the above is premised on the idea of aid as teaching people to fish and not merely giving them fish — though I suspect a lot of aid tends to be like giving out fish and not teaching.

Aaron Miller April 7, 2013 at 9:12 am

What makes Robin’s comments so frustrating is that he’s a smart guy who should know better.

Robin is ignoring the growth rate of the problems that could be solved by donating today. ***Social ills usually grow faster than the return on capital.*** The cost to individuals and society for things like violence, malnutrition, lack of education, and disease won’t pause its growth waiting for your donation. Think of an effective donation like an investment. It’s better to invest now than later.

This, of course, assumes one’s donation is effective, but an attentive donor can usually be as sure as an attentive investor.

byomtov April 7, 2013 at 10:44 am

Exactly.

Comparing the return on investment to overall growth does not seem all that relevant.

The relevant growth rate is the return on the money as applied to a specific problem. And I’d ad that “growth rate” in that case is not so easy to quantify.

And let me add that if you want to apply this pseudo-economic reasoning to how many charities to give to, you should consider the marginal benefit of your contributions, not average effectiveness. That might cause you to give to many charities.

Pretty silly stuff from Hanson.

eddie April 8, 2013 at 1:49 pm

Wow, that is a very persuasive argument. Thank you for bringing it up.

My (utterly worthless) intuition is that the return from a well-spent charitable contribution will be tremendously better than the return from holding and investing the funds. Seems obvious, really. Two and a half grand can save a life, or it can generate $250/year. Which one has a better long-run payoff? The former, surely, even if the estimate is off by an order of magnitude or two.

Ensuring that the contribution will be well-spent is, of course, a real concern. Perhaps this is an argument for holding and investing the funds not until one’s death, but until a charitable cause emerges whose social return is not merely probably positive but demonstrably and certainly positive. Hold onto your chips until GiveWell says their work is done, then start sending checks every year.

mw April 7, 2013 at 10:21 am

I love the world of economics–it’s one of the few where uncertainty often doesn’t exist! So refreshing. Outside that magic world, though, I wonder whether a person would ever again be able to get taken seriously if they said something like “this coin has a 90% chance of landing heads, therefore everyone should always bet all their money on heads.” Probably not, but then that’s what gives economics charm.

Joss Delage April 7, 2013 at 10:22 am

A lot of charity giving is for social purposes quite different than charity per se. People often give to charities that are important not to them but to their social network. They give to the friend participating to the March of Dimes, not so much because of the cause but because of the friend. They give to the non profits where some other friend is a board member. Etc.

John April 7, 2013 at 10:41 am

Whose’ time preferences should dominate the efficiency criteria for the charitable donation? I think the argument must assume that it’s the donor’s that matter because they will then see a larger sum donated. That’s going to leave a lot of people without charitable support for a lot of years if all charity givers take this advice.

If we look at the internal rate of return for the recipient I suspect that rate will be greater than both the growth rate or real rate of return on investments. In this case it’s more efficient to spend now rather then in the future.

jseliger April 7, 2013 at 10:47 am

I agree with Robin in theory. In practice, however, it does not seem that most people who do donate to charities do so for efficiency reasons; rather, they donate for self-aggrandizement reasons, even if those reasons are cloaked as pure altruism. Consequently, charities that make a big show over donors will win more donations, even if the big show is not efficiency.

jdm April 7, 2013 at 11:10 am

“…you should invest the money at compound interest, then donate it to charity later after your investment has paid off – preferably just before you die, since donating money after death is legally complicated … He gave his classic example of Benjamin Franklin, who put his relatively meager earnings into a trust fund to be paid out two hundred years later; when they did, the money had grown to $7 million …”

Donating money after death is not legally complicated, as noted above by other commentators. But more to the point, let’s suppose that Franklin’s scheme were legally permissible today. Under current law, if I understand it correctly, charitable endowments must give away 5% of their assets each year; but clearly there is nothing magical about the 5% figure – it could as well be zero, and let’s suppose, for the sake of argument, that it were zero. Following Hanson’s logic, the endowment should never payout any money whatsoever for charitable purposes so long as “the real rate of return on investment [is] higher than the growth rate”. That is, Hanson is not arguing that primarily that charitable donations should be made wisely and anonymously, but that they should not be made at all.

Margin April 7, 2013 at 12:12 pm

Can we expect the real rate of return on investment to always remain higher than the growth rate?

jdm April 7, 2013 at 3:56 pm

I have no expectations one way or another on that question, but Hanson evidently claims that the “real rate of return on investment has been higher than the growth rate for 3000 years and this pattern shows no signs of changing.”

byomtov April 7, 2013 at 6:10 pm

I didn’t know the S&P index went back that far.

byomtov April 7, 2013 at 11:32 am

One of his claims that generated the most controversy was that instead of donating money to charity, you should invest the money at compound interest, then donate it to charity later after your investment has paid off – preferably just before you die, since donating money after death is legally complicated. His argument, nice and simple, was that the real rate of return on investment has been higher than the growth rate for 3000 years and this pattern shows no signs of changing. If you donate the money today, your donation grows with the growth rate, but if you invest it, it grows with the interest rate. He gave his classic example of Benjamin Franklin, who put his relatively meager earnings into a trust fund to be paid out two hundred years later; when they did, the money had grown to $7 million. He said that the reason people didn’t do this was that they wanted the social benefits of having given money away, which are unavailable if you wait until just before you die to do so.

By this “brilliant” argument there should be no charitable contributions at all. When you investment has “paid off” (when is that, exactly?) you should reinvest the money rather than giving it to charity, because … see above. Franklin’s trustees were irresponsible, by this argument, to distribute the $7 million, rather than reinvesting it. I’m also dubious about his claim concerning benefits. I just made a contribution to a charity. I will get no social benefits from it. What I get is a computer generated acknowledgment that is of value only in the unlikely event that the IRS decides to audit my tax returns. No parties, no pictures in the newspaper, no naming rights, nothing.

andrew fischer lees April 9, 2013 at 12:08 am

{chump}

rapscallion April 7, 2013 at 12:19 pm

The “only donate to one charity” rule is just a result of trying too hard to be contrarian. There’s no reason you can’t think multiple charities give the same social rate of return, and thus you can be indifferent between giving a fixed amount all to one or split it among them. If splitting it also gives the you the benefit of warm fuzzies about yourself, utilitarianism says go ahead and diversify.

andrew fischer lee April 9, 2013 at 12:11 am

well, robin would not want you to just speculate about what the social rate of return is, but to actually run the numbers.
The chance that rateA == rateB is pretty slim. Much more likely that rateA >< rateB

mulp April 7, 2013 at 12:36 pm

What is stupid about this post is the blindness to the fact that the majority of charitable contribution is in free labor and contributions of goods that are no longer needed.

So. rather than donate 3 hours a week to my church or the food bank, I should bank the 3 hours until I’m near death and contribute 50,000 hours of work??

Above others mentioned Carnegie who was an active investor in public works – he saw education, literacy, knowledge is things society needed more of so he actively engaged in a program of building libraries all over.

But for those who don’t have the money of Carnegie or Gates, it is still possible to put in time and resources in charity work. What better way to ensure your limited funds are will spent by your church than contributing first your labor in running the church, and if you are concerned about the hungry, then you engage in a free kitchen for the hungry, perhaps meals to the elderly and shut-in at the church. You know that what appliances are needed based on being involved in preparing the food, making it up, and delivering it to those being helped.

But this is just an indication of how much economists ignore the natural world and abstract everything into money and consider money to be the sole definition of human behaviour AND NEED.

The ability to solve problems, like creating an organization and keeping it going to deliver meals to the needy in the church which are on a list that is maintained to help address problems of those in need, is priceless. No charity can afford a corporate manager who is the most efficient at handling details, but 3 people with heart can do in 5 hours what the manager would do in 10 minutes, but they will work for free and get a big reward in the fellowship of problem solving.

Matthew Rekoske April 8, 2013 at 2:46 am

Yes this analysis ignores non-monetary contributions, but it focuses on inefficient charity and I’d guess that most of those hours of free labor would fall under that category. Those “3 people with heart” could surely earn more than enough to cover your hypothetical manager’s 10 minute consulting fee by spending those 5 hours working their normal day job instead. I suggest you take a look at http://lesswrong.com/lw/65/money_the_unit_of_caring/

Bryan Willman April 8, 2013 at 10:12 am

@Rekoske ““3 people with heart” could surely earn more than enough to cover your hypothetical manager’s 10 minute consulting fee ”

I know for a proven fact that this is sometimes not true. Because the “people with heart” ARE people with 1st rate skills. And there are technical people (including me) they couldn’t afford to hire no matter what they did.

In any case, any time (like know) unemployment is above the frictional rate, saying “work more hours to hire …” is an impractical plan.

Never mind the issue of maybe a person would like to do more than one thing in their life, and the degree of specialization we can tolerate is very very large bug nonetheless finite.

Bryan Willman April 7, 2013 at 12:41 pm

A lot of this is naive. Some people do give “secretly” (or at least very low profile) – in particular, me.

One argument for “all to one charity” arises assuming the total budget is say $500 per year. $500 devoted to one or two good causes may be rather more effective than $5 sent to 100 causes. If the annual budget is 5 figures and up, this issue disappears. $1000 is enough to exceed admin costs most anywhere – so $1000 gifts to 10 orgs can be reasonably efficient compared to $10K to one org.

Another thing people hint at is “purpose” and some key purposes seem to be missed. I’ll list some (most aren’t me but people I know, but some are me.)

a. They need money now to get a facility now to keep functioning at all. (A bequest just before or after my death? Decades in the future? What other venture of any sort could possibly work that way?)

b. The more money I give them, the fewer hungry vagrants I have to confront on the way to work

c. They lower the unemployment rate a small but observable amount, which helps reduce support for my political opponent.

d. I need the tax deducation this year.

e. There’re an arts org and if I and my peers don’t give money this year, there will not BE a show/play/opera this year. (Charitable contributions to organizations that produce something the giver consumes are actually a very big thing in the “arts” world.) Now, “all to one charity” when you like both plays and operas falls flat. And “give it with interest later” is utterly useless.

f. Social relations causes as noted above – but while friends and business associates are listed, the powerful forces of getting my “spouse, parent, sibling” to shut up about it aren’t. Never underestimate the value of giving this year to get a “socially motiviated” spouse to calm down.

g. An expression of grief. I think almost no one finds solace in the death of pet by starting a foundation that will fund animal care several decades in the future. Especially when the local shelters are under pressure NOW.

afl April 9, 2013 at 12:12 am

your secret is out!

Bryan Willman April 7, 2013 at 12:43 pm

@Mulp = +10.

Yes, I’m suppose to save my spare laserjet in the attic until the year before I die (which I can somehow predict????) and then decades in the future contribute this now rotted device and my by then very stale IT skills? What planet is Hanson from????

David Barker April 7, 2013 at 1:28 pm

Investing the money contributes to capital formation, which accelerates economic growth. Growth alleviates more hardship than any charity ever has. Why not invest the money, taking out enough for your own consumption to incentivize yourself to keep managing your investments? Why not then pass the money to your children so that they can do the same thing? Wealth that grows faster than consumption is the best possible gift to society.

Margin April 7, 2013 at 1:48 pm

Very good points.

But if you don’t have children, maybe you can find a legal format that continues this idea beyond your death?

Maybe a charitable fund could be bound to invest and grow until a change in economic conditions trigger goal-bound charitable activities?

Naturally, due to basic resource and efficiency constraints, economic growth has to slow and then reverse in the (very) long run.

Manny April 7, 2013 at 4:57 pm

One reason not to wait until just before your death is hyperbolic discounting. How to make sure we overcome that bias? Well one way is to give money away continuously throughout our life time.

Steve Sailer April 8, 2013 at 12:22 am

What compound interest?

The notion of compound interest is so pre-2008.

afl April 9, 2013 at 12:14 am

+1.
I wonder how long it will take for these questions to cease to bedevil algebra II students

Ricardo April 8, 2013 at 3:44 am

If the risk-adjusted return on investment is higher than growth rate of the economy, wouldn’t the natural consequence of this state of affairs be that eventually a small oligarchy controls the entire economy? Since this is not, in fact, what we observe, I am extremely skeptical of Robin Hanson’s claim. In the long-run, bad money managers, government expropriation, taxation, inflation, financial crises, and legal barriers set up precisely to prevent large parts of the economy being run by hereditary oligarchs or trusts seem to make long-term investing much less profitable than it might appear at first. See, also, people who had bank accounts in Iceland and Cyprus.

Tyler April 8, 2013 at 9:36 am

As some others have suggested, this argument is a bit to oversimplified as it relates to the compounding interest approach to donations. The question to ask would be if the risk-adjusted NPV of the investment from the point when it would be donated is greater than the value of the impact the donation would have today if it is used in the most effective way possible (see the donating to the “best” charity point). Essentially this is saying that you can get a better risk-adjusted ROI by investing today in a proven charity than by investing in some investment portfolio. This hypothetical requires that one have good information on the effectiveness of the charity, but those resources exist.

* It is worth noting that when I refer to “value” and “returns” this includes economic and human value, which adds some subjectivity.

** Ben Franklin also once said, “Never leave that till tomorrow which you can do today.” He’s a lesson in contradiction.

Tyler April 8, 2013 at 4:29 pm

too* oversimplified

afl April 9, 2013 at 12:19 am

“He’s a lesson in contradiction.”

yea, he was a Founding Father. That’s pretty much their modus operandi.
Now, if only the supreme court would realize that

Nina April 24, 2013 at 12:21 am

The charity it is start within the house and expand the love towards other person. It is amazing on how people help other people with out any return.

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