Freakonomics in the Times Magazine: Bottom-Line Philanthropy

In their March 9, 2008, column in the Times Magazine, Dubner and Levitt ask: why can’t a charity be run more like a business? They look at two philanthropies that have adopted unorthodox business models. Smile Train, which performs free cleft-repair surgery for poor children around the world, started training local doctors rather than flying in U.S. surgeons; this has helped make Smile Train one of the most productive charities, dollar-for-deed, in the world. The second philanthropy, proposed by a world-class poker player, wants to create a $10 billion “cure cancer” prize with a hitch: a cash dividend paid to the people who donate the $10 billion. Below is some of additional information about the column.

1. Smile Train has performed more than 280,000 cleft surgeries around the world in the past eight years. Here is a country-by-country breakdown. Below is a photo of Smile Train president Brian Mullaney and “Soccer Boy,” who was the catalyst for Mullaney and others deciding to change the way a cleft-surgery philanthropy is run.

soccer

2. This paper by the economist Robin Hanson (“Patterns of Patronage: Why Grants Won Over Prizes in Science”) and this masters thesis by Jüri Saar (“Prizes: The Neglected Innovation Incentive”) chronicle some famous prize incentives, from the Longitude Act of 1714 to the X-Prize. This interesting article by the Times‘s David Leonhardt discusses Netflix’s effort to improve its “Cinematch” rating system by offering a $1 million prize to whoever beats the existing system by at least 10 percent.

3. Rafe Furst, a World Series of Poker champion and proud member of “the Tiltboys,” explains his vision for a new kind of philanthropy on his blog. Dubner wrote previously about Furst’s new prediction market “Truth Markets.” Furst has also contributed to this blog on the subject of why there are so few Indian-American poker players.


Julien

About the prize thing. I think it is a free rider problem. Some gouvernment are paying researcher to work about Machine Learning, and these People can choose their precise subject within the theme of their research. By proposing a prize, you are using public goods (the time of research) for you personnal benefits. That's free riding. And that's wrong. If researcher weren't allowed to receive the reward, because their employers would confiscate it (which i find quite fair) they wouldn't do the research.

anna

AaronS#12
Clearly you're a smart guy. Why, do think, most people in the world believe that Americans are idiots? Do they all know you?

John H

I am a big fan of Stephen Dubner and Steven Levitt's Freakonomics column but I have to take issue with the content and conclusions they drew in this one. The title of "Why can't a charity be more like a business?" promotes the discredited notion that if we would just trust the magic and wisdom of the private sector and run everything like a business we would all be better off. They then go on to present two examples that show how badly these fuzzy headed do gooders have botched things and how the magic of the private sector will deliver real solutions.

But let's look at the facts of these articles. First, they conclude that Operation Smile did not have a business model. They clearly did have a business model, it just had limited supply chain capacity, perhaps one that best fit the talents of most of the people in the organization (not unlike many businesses). Mr. Mullaney is to applauded for his innovative thinking but the process he followed is pretty similar to the situation where someone comes up with a winning formula for, say, a restaurant and is looking for a way to radically expand the business through a franchise operation. To quote from the article, "Smile Train has also harnessed technology to create efficiencies in every aspect of its business". Hmmm, sounds a good bit like McDonalds (which I acknowledge is a perfectly fine business model and seems to have been used with good results in Smile Train). But my real point is that there are lots of examples of franchise operations where someone bought the winning formula but the actual creator chose to stay with their original, small time operation because that is what they did best. The fact that they wanted to focus on what they did best was not evidence that they need to be "more like a business".

As to "what store turns away 80% of its customers?" I'd invite Mr. Mullaney to check out the numerous examples of shortages of the latest computer game consoles that seem to occur every Christmas (how could this happen in an actual business?). He also might take a look at the US health care system if he wants to see a business model that is really dedicated to turning away customers.

But I think this is just a warm up to where the wheels really come off. Again, I applaud Rafe Furst's commitment to using his fortune to seek a cure for cancer but I was a bit stunned by his observations and conclusions. First, the article states that "the cancer-research community, he felt [Furst], was made up of competing interests and misaligned incentives, where financing dollars and even information where hoarded". Has Mr. Furst ever worked in a large a business (or any business)? I spent the last 25 years or so working in large, successful business organizations and I'm sorry to break the news that competing interest, misaligned incentives, hoarding of financing dollars and even (!) hoarding of information is pretty much business as usual in the typical corporate environment. That being said, I'm left wondering what actual behavior Mr. Furst expects to change in incenting the cancer research establishment to "be more like a business".

But now Mr. Furst provides us with a brilliant solution. First, he is going to establish a $10 Billion prize. I'm not sure I got this right but it seems like he is proposing that the $10 Billion won't go towards actually supporting cancer research but will incent cancer research and be awarded after the "cure" is discovered. I think the idea of a prize is interesting but one of this size seems truly wacky. How about a $1 Million prize and spending $9,999,000,000 to support MORE research or better yet, to provide care for the millions in this country that have serious illnesses and cannot afford treatment. But there is even more to the "more like a business" approach in this solution. Mr. Furst is going to fund this by getting investments from his rich friends and guaranteeing 15% returns by getting some of his other, presumably rich, friends in the hedge fund industry to help out with the returns. Great idea, let's bring in the guys from Long Term Capital Management or the even smarter guys from Enron (ok, I acknowledge that Ernon was not a hedge fund but they were sure thinking like a business, especially when they were incenting power plant operators in California to take their facilities off line).

Ok, to bring this rant to a close, let me just say that I'm just completely fed up with the American mantra, apparently introduced through something in the water supply during the Regan administration, that the natural forces of the private sector are the cure for every issue, large or small, facing our society. And, that charities and other nonprofits are managed by well meaning dimwits (or worse) that are simply incapable of success since they are incapable of adopting a "more like a business" approach to the problems they are trying to solve. For some outstanding recent examples of what the private sector and the "more like a business" approach has delivered in terms of solutions, consider our health care system (America's 40 million uninsured applaud our apparent addiction to private insurance programs) , student loan program (loans from private lenders are way better than government programs), and the subprime mortgage melt down (why regulate mortgage brokers?). It is sad to see that Stephen Dubner and Steven Levitt have chosen to promote this outdated and discredited notion.

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anna

Ok, it's time for me to vomit again.
Yes, all we need ... is more business/and more "philantrophy".
The country has 50 million uninsured, wage slavery, illiterate population with barbaric mentality "the rich are rich because they are rich," invasion of foreign countries, and yet another barbaric Chicagoan tells that we need more of it.
No shame, no decency, just pure greed.

Steve P

I was a little skeptical about the piece - oh, great, more folks asking why charities don't act like "businesses". Because they're not, thats why! But then, the closing line of the article put just the right spin on it - charities and nonprofits should be seeking to be so successful at their mission that they put themselves out of business. All charities and nonprofits should adopt that philosphy.

Naim

Hopefully other non-profit organizations will catch on to capitalistic principles, and begin to make the difference they desire.

Lyn LeJeune

This is wonderful, your pointing out how charities are able to fulfill their purpose. I get really annoyed when I see fundraisers in swanky venues for the very, very rich. And The Tiltboys!!! I love, love this! I'm trying to run one myself, trying to raise awareness about public libraries (not everyone can afford a 30.00 hardcover book or even a paperback) and reading and connecting that with helping to rebuild the public libraries of New Orleans, really, the city of New Orleans. So, mine is a combined charity. Thank you for the information about how other people succeed.

Lyn LeJeune-The Beatitudes Network-Rebuilding the Public Libraries of New Orleans at www.beatitudesinneworleans.blogspot.com

Mayur Misra

Read the article. Really good.
Keep up the good work.

Sonny Day

There's an interesting article over at Wired about the Netflix Cinematch competition and how a psychologist might beat the various teams of math whiz kids to the prize.

http://www.wired.com/techbiz/media/magazine/16-03/mf_netflix

SIA

While Rafe Furst may have a big idea to battle cancer through prizes and profits, he has not yet shown results. But, there already are a few venture philanthropy organizations, like the Multiple Myeloma Research Foundation (MMRF) that have shown success by following smart business plans to address the issues inherent in drug development. The MMRF is a charitable foundation that aggressively funds myeloma research and brings together the biopharma industry and academia and matches the success factors necessary for fast-track drug development, that have shown success by following smart business plans to address the issues inherent in drug development.

Following is a link to a CNNMoney.com video broadcast that chronicles the MMRF founder's transformation from young successful pharmaceutical executive to multiple myeloma survivor and advocate fighting to accelerate the research for a cure. The MMRF founder, Kathy Giusti, is a Harvard-educated pharmaceutical executive who, as a 37-year old mother of an 18-month old daughter, in 1996, was diagnosed with multiple myeloma, a uniformly fatal blood cancer with a five-year survival rate of only 32 percent. Like Mr. Furst, Ms. Giusti, saw that the traditional model of academic research and pharmaceutical drug development wasn't working fast enough for patients. To address these issues, Ms. Giusti founded the MMRF whose mission is to urgently fund and conduct myeloma research to bring drugs to patients as quickly as possible through a model of collaboration and accountability.

Ms. Giusti's strong business and pharmaceutical background have helped her successfully navigate roadblocks, confront institutional barriers and create business solutions to accelerate a cure for multiple myeloma. Nine years after founding, the MMRF has raised close to $100 million, using 95 cents of every dollar to directly support its mission of accelerating the search for a cure. Among its many successes, the MMRF has helped to bring four drugs to market for myeloma, created a tissue bank for further research and initiated a genomics portal to study the genetics of the disease. In addition, the MMRF has funded more than 200 research grants at more than 70 research institutions around the world. The organization will fund more than $50 million in research over the next three years and will open 6-8 new clinical trials in '08.

CNNMoney video link: http://money.cnn.com/video/ (under "Top Stories," look for video titled "A fight to the end")

MMRF website: http://www.multiplemyeloma.org/

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Maurie Beck

Dubner and Levitt - Furst's greatest insight may be the recognition that, for many people, the act of altruism is not as pure as it might seem.

I realize this drifts from the pragmatic to the theoretical, but evolutionary biology has borrowed from and reimbursed economic theory for a long time. There has been a lot of work in evolutionary theory regarding altruism and how it would persist in a population when it would theoretically lower the altruist's own fitness.

In the early 1960's Wynne Edwards (1962) proposed a group selection argument that hinged on an individual who reduced its own fitness, thereby making a group stronger in relation to other groups. Supposedly through group selection such an altruism gene might persist and spread through the population. However, this is not a evolutionary stable strategy because it is easily invaded by a cheater (a free rider) who suffers no cost, accruing only benefits. Such an individual would produce more offspring and eventually the altruism gene would go extinct.

The first to find a way for apparent altruism to operate as an evolutionary stable strategy was by W.D. Hamilton (1964) with his kin selection model rB > C, where r (relatedness) is the proportion of an the altruist's genes that is shared with the recipient of the action, B is the benefit, and C is the cost. For example, if I share, on average, half my genome with my sibling, then the equilibrium for B is 2 if I perform an altruistic act. This is because, even if I die, my gene's live on in my sibling.

Kin selection was then extended to reciprocal altruism by Robert Trivers (1971), who showed that an altruistic act to a non-relative could provide a benefit to the altruist at some future date through a reciprocal interaction. Both of these cases involve benefits to the altruist at an individual level, without having to rely on group selection arguments, and thus are not pure altruism.

Since then, the above models have been extended to include other cooperative interactions, including mutualisms by different species (e.g. Jeff Fletcher at UBC). In addition, Zahavi (1977), by applying his own handicap principle, showed that apparently altruistically acts are actually selfish in nature. For example, in babbler (a small cooperative bird) flocks, individuals who food share were not doing it because of pure altruism, but because it enhanced their social prestige, much like Potlatch ceremonies. Only high status individuals could afford (the handicap) to do food share and when low status individuals tried they would be thoroughly trounced. Therefore, what appeared to be altruism was actually a selfish interaction that potentially enhanced the 'altruists' own fitness. The status model fits well with philanthropy. Unfortunately, in humans, some individuals anonymously make philanthropic acts. How does one explain that? My opinion is that humans have managed to unconsciously incorporate unselfishness into acts because such acts actually enhance fitness. These acts often involve reputation, which helps in social network situations.

Further work has been done with reputation in social interactions. Reputation is closer to true altruism, although it also has costs that directly affect fitness. By maintaining a good reputation (costly), an individual may enhance its own fitness through cooperation, but only if it acts cooperatively itself. If the individual cheats, it loses future cooperative interactions.

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David Hindin

I was a late reader of the the March 9, 2008, column in the Times Magazine, "Bottom-Line Philanthropy". I finished with the same question that commenter #13, Matt F, posted on 13 March: "Maybe I missed it but I didn't see this in the story - did soccer boy ever get his surgery? "
The photo in this Blog (Smile Train president Brian Mullaney and "Soccer Boy," who was the catalyst for Mullaney and others deciding to change the way a cleft-surgery philanthropy is run) further compels the question. Has the oversight (and the cleft lip) been subsequently corrected?
Thanks

Carlo Maley

In response to John H.'s comments and Rafe Furst's idea of an X prize in cancer research:

I am an academic cancer researcher. There are a few things that people should know about the economics here. The National Cancer Institute (part of the NIH) spends over $4G per year on cancer research. Top researchers typically win grants worth $10M and sometimes even $100M. So I'm pretty sure that psychologically, a $1M prize would not be a big incentive (we already figure you could make much more than that on patents for a cure). It is my guess that you'd have to get up into the $1G range before eyes would start to pop (and to overcome the reluctance to pursue a research idea that is likely to fail - none of us think that curing cancer will be easy). Similarly, $1M is chump change for a pharmaceutical company, but it is my guess that $10G would even make people in industry sit up and listen.

I agree that defining what it means to cure cancer would be hard. Since there are so many different types of cancer, finding a cure for cancer is like finding a cure for "infectious disease."

Another relevant issue for the time line is that a clinical trial to prove that the intervention/drug (that you've been working on for the last 10 years) really cures cancer, takes about 5 years (more since it takes time to accrue patients into the study). So the development cycle is very long.

I still think Rafe Furst's idea is a good one. The NIH typically funds very safe research, especially in times like these when funds for cancer research are being cut. They don't want to be this way, and there are some small opportunities to pursue "high risk/high payoff" ideas, but not much. Only projects that have a high chance of succeeding (i.e., safe proposals) get high scores from our peers in the grant review process. So we need some way to provide incentives that will stimulate people to take chances.

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Rafe Furst

You all make some great points and I'd like to address them, but the discussion will be more fruitful if you first read more detail on the proposal:

http://rafefurst.wordpress.com/2008/03/11/x-prize-annuity-funds/

For those who want some more background on the quagmire that is cancer research and treatment today, here are some good starting points:

http://rafefurst.wordpress.com/2008/02/07/complex-links-cancer/

Dave

"Government, run by endless compromise and committess, is inherently incapable of making breath-taking, breakthrough programs."

Yes, that's right - the atom bomb, man on the moon, eradication of smallpox, etc...

The prize would be available to public sector scientists too, so this has nothing to do with it.

Prizes can be an interesting addition to traditional funding, but they can discourage cooperation (exchange of knowledge is vital to the scientific process) and incentivise cheating or distorting results.

10 Billion seems an excessive amount to put in one pot, and the objective is not well defined, it looks more like self-aggrandisement posing as philanthropy.

notkevinnealon

Hey, ease up anna. I can understand why you might be maddened by AaronS' postings. However, one of the reasons that I love this blog is the diversity that it brings in. I'm glad that Freakonomics is not solely populated by back-slapping, self-congratulatory, like-minded Levitt-ites. Comments such as yours may dissuade other, possibly important voices, to remain silent.

A question about these prize incentives, though:

Ultimately, did the Ansari-X prize contribute anything useful to the goal of cheap space flight, or was each 'entry' a means to an end?

John H

To respond to Nick M's comment:

I don't think I missed point of the $10B prize, it just seems to be to not be a very effective way to spend $10B to cure cancer (which I did not explain very well in my previous post). I think there are a couple of points to be made here. First, The fact that the Ansari X Prize of $10M prize spurred spending beyond the value of the prize (let's agree for argument's sake that it generated 10X in spending) does not necessarily indicate that a $10B prize will have the same impact on cancer research. I just don't think it follows that if a $10M prize was effective that a $10B prize will be, well, 1,000 times as effective. This is just opinion, but it seems to me that this is not a linear relationship and that at some point every dollar spent on the prize becomes less effective in generating investment. I'm not sure exactly what the curve looks like, but I am pretty sure that Mr. Furst could get a pretty good bang for his buck in incenting cancer research with way less that a $10B prize. As I said in my previous post, I think a prize is a good idea, it just strikes me that a $10B prize is likely to be a pretty ineffective use of capital if the goal is to cure cancer. Frankly, a $10B prize sounds more like throwing money at a problem than "thinking like a business". However, I'll concede that a $50M prize might do more to achieve the goal than a $10M prize but I have a hard time going beyond that (admittedly a completely arbitrary boundary).

But the other key point here is that there is a moral issue at play. Finding a cure for cancer is in an entirely different moral realm than launching a rocket. The fact is that people are suffering from and dying from cancer now. I think any application of $10B to this problem has to take into account the suffering that is taking place now, today, with real people. This is not a moral issue that a rocket project has to contend with. To conclude the point, if I were thinking "like a business" and had $10B to spend and wanted to have a real impact on finding a cure for cancer I think a far more effective use of the $10B would be to create a significant prize, say $10M-50M, and spend the rest directly supporting research and providing treatment.

As an aside, I think it is worth noting that cancer research is a very big business (and in may cases seems to be "thinking like a business") and I'd be willing to bet that even a $10M prize would have some unintended and unanticipated consequences on the current establishment that would leave the individual offering the prize rethinking their approach.

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Mike Dewey

I read with interest the column in the NY Times on Sunday regarding Mr. Rafe Furst.

You will be interested to know that this concept is already fully formed and operational. The Victory Project launched recently, offering $1 Billion awards for Breast Cancer, Diabetes, gasoline efficiency and emissions reductions. The response has been amazing.

We are already receiving submissions from inventors and donations from around the world.

You may see the website here: http://www.deweyfoundation.org , and some articles that have already been written about the project by clicking on the 'news/blogs' page.

Many thanks,

Mike Dewey
The Dewey Foundation

Nick M

John H -
You wrote:
How about a $1 Million prize and spending $9,999,000,000 to support MORE research or better yet, to provide care for the millions in this country that have serious illnesses and cannot afford treatment.

This totally misses the intent of these types of prizes which is that the prize money will inspire much more research in total than the prize itself is worth. For example, the X-prize was for $10 million. Much more than that was actually invested by teams competing for the prize. According to Wikipedia (http://en.wikipedia.org/wiki/Ansari_X_Prize), the amount invested was over $100 million. If a similar multiplier happens with this cancer research prize that will be over $100 billion for research.

I think the more interesting question is how will the prize be awarded. "Cancer" is actually many different diseases. Curing one may not cure another.

Matt F

Maybe I missed it but I didn't see this in the story - did soccer boy ever get his surgery?