The Price of Advice: Chronicles of a Young Philanthropist, Part III

Readers of this blog might recall my earlier posts about Michael, a young man who is expecting to donate about $70 million over the coming decade.

In the last six months, Michael has committed himself to understanding both the responsibilities and challenges of philanthropy. There was some interest in his progress among Freakonomics readers, so I thought it might be good to follow him around for a while.

Consider this a “blog alert,” if you will.

Some background: I met Michael at Harvard over a decade ago, when I began a study on the young and wealthy in their twenties. Michael was a junior at Harvard College and so he didn’t fit into my protocol.

Last year, Michael called me because I had advised a few of his wealthy peers who were forming family foundations. I’m no expert in wealth management and I initially turned down the offer to give advice. But on one point I thought I could be useful.

I knew that philanthropy is most effective when the donor has a clear understanding of his/her own role and can answer the question, “What is motivating me to give?” After completing my research on a sample of elite twenty-somethings, I noticed that few people had a clear sense of their self interest — most people explained that they want to change the world. While there is nothing wrong with this motive, it’s predictable.

I told the three people who came to me for advice that, in my opinion, prospective donors had two traits working against them.

First, they confused charity with commerce: that is, they uncritically applied the language of outcome-oriented investment to efforts to change human behavior in social settings. Humans, alas, don’t operate neatly according to market logic, though incentives can shift behavior.

Second, donors seem reluctant to talk about their own self interest. Instead of admitting their personal desires, they speak of selfless charity. Of course, donors can do whatever they want with their money, but this attitude doesn’t help them grow.

The three donors asked for my help in crafting a strategy for alleviating urban poverty. I agreed to work with them for one year, but with conditions. Most important, they had to arrive at a “loss figure” — a sum of money that they would give away (to actual causes), but which would be entirely devoted to their own learning.

They had to forgo any serious outcome-based evaluations of the families/service providers who received their support. (They turned over the management of the grant to a donor-advised fund.) Instead, they had to privilege and pay attention to their own development.

At the end of a year, we would reflect on the impact of their philanthropy: we would talk about their experiences, their sense of how their money impacted the families, etc.

The catch: whether they liked the results or not, they had to provide a second grant disbursement to the organizations (contingent on the fiscal responsibility of the recipient grantees). I felt this freed them up from the expectation of evaluating anything other than their own personal transformation. The three donors agreed on a “loss figure” of $500,000, meaning they would each give $1,000,000.

I did not receive any compensation. I was interested in accessing a world shut off to scholars. So as in the past, I only asked that they speak to me at least over a ten-year period, so I could track their stewardship of their respective family foundations.

The year-long process taught me a lot about the civic sensibility of the modern American elite. Perhaps most illuminating: the donors had very rigid ideas concerning the capacity of poor people to change their behavior. When they met poor families (in Chicago and New York), they expected that their money would have magical powers. I exaggerate only slightly.

They believed that poverty was largely a result of resource deficiencies and organizational inefficiencies: if the poor had more money and their service providers could simply manage their giving more efficiently, change would happen. None placed much emphasis on feelings of self worth, the long-term nature of behavioral change or, most important, that staying above water is itself an accomplishment for a poor household. Everyone modeled their expectations after their family business or other corporate workplaces where they saw the “bottom line” motivate people to meet certain standards of achievement.

Over the year, about two dozen poor families welcomed the donors into their lives. They opened up their household budgets; they were candid about their illegal activity; a few shared their private journals. The conversations were moments of honest self reflection.

Over dinner, the donors told poor families (sometimes angrily) that they expected change to occur more quickly; the parents around the table educated them about what kinds of change can reasonably be expected. For their part, the poor received an intensive dose of market logic, and many now use incentives in the home to motivate family members. Privately, the donors admitted uncertainty about the capacity of philanthropy to change people’s behavior. Along the way, each wondered whether they should give up and focus on other pursuits.

I don’t think any of the three donors became enlightened after the year was over. I doubt I have much of a future in professional consultation.

The three individuals continue to operate family foundations, but they all reacted differently to the intense exposure to daily poverty. The one consistent outcome is that each remains true to the philosophy of entrepreneurially-oriented investing: i.e., the use of incentives, emphasis on individual responsibility, pursuit of investment-oriented gains on charitable giving, etc.

I might point to one other result of this process: the donors came away with a much better sense of their own assumptions/stereotypes. They had to think as poor people do, even as they tried to change poor people’s thinking.

For example, they learned that poor families who have access to small amounts of cash — as little as $20 — can stave off problems that might otherwise spiral out of control. (Previously they dismissed the utility of using such small sums for change.) Of course, credit unions have long understood this — and one of the donors is now helping to fund organizations that replicate this strategy in New York.

They also learned that, in some cases, process is as important as outcome. For example, service providers who keep families together — despite dramatic improvements — are playing a valuable function in communities where things always fall apart. And even if a child’s grades don’t improve, sometimes staying in school is a huge mark of success for the family.

All of this brings me back to Michael. When he asked me for advice, I said no. I was only interested in tracking his progress objectively. I told him to consult a few experts.

Then he asked about my experiences with the three donors and he actually spoke with each of them. One evening he phoned me excitedly and asked that I run him through the same paces. When I asked why, he laughed:

Each person I called told me they had more anxiety giving their money away than running a business. I’ve been losing sleep for a year trying to give this damn money away. They all said that the year (with you) was mostly about figuring out what they wanted out of the deal. I think I need that.

I told him I would consider it, but I suggested that he begin by taking the advice of professional experts — firms with accomplished track records in money management and charitable consultation. This led to an agreement: before we decided to work together, he would invite the counsel of professional experts. (Recall that he has already asked for suggestions from readers of this blog as well as “The Thugz” — the guys with whom I watched season five of The Wire.) And if we did work together I would receive no compensation — only the freedom to document his experiences.

He has retained three professional advising firms. The cost is not cheap. He is paying three consulting firms a total of $19,000 for three independent assessments. (Each assessment comes with a conceptual plan that can guide Michael over the next ten years, as well as a practical description of the firm’s services during that time period.)

Each firm was asked to respond to Michael’s stated desire to “be involved and learn from charity.” Michael made it clear that he was interested in the process of giving; he wanted more than a simple update every six months about the status of his money. He asked each firm to provide him with a strategy for learning along the way.

In two weeks we should have the results.

Finally, because I couldn’t resist, I asked Michael to throw a little business to my friend Dorothy, who offered to provide him with a similar game plan. Dorothy has helped me with field research in Chicago’s ghettos for years, and her voice has filled these pages on several occasions. With no prompting from me, Dorothy said her fee would be $275 ($225 plus bus fare to visit a few poor communities in the suburbs). I wonder if I should tell her what the firms are getting paid!

The three experts that Michael consulted asked that I not identify them, but they were all gracious enough to allow me to quote anonymously from their work.

Stay tuned.

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  1. ben says:

    So if $20 can help a poor family “stave off problems that might otherwise spiral out of control”, Michael could have helped nearly 1,000 families rather than hire three consulting firms to figure out how to give away his money. One more small demonstration of how the wealthy are so self-centered that even when they are feeling “charitable” they often start out by taking a step backwards.

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  2. Writer's Coin says:

    Kudos on being in a position to glean from some previously inaccessible data.

    Curious to see what the results are long term

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  3. B K Ray says:

    Wow, what and adventure this should be.

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  4. Fred says:

    Ben does not seem to understand that if you are giving away $70 million and don’t spend $19,000 on consultants, you may end up wasting millions…

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  5. Darshanand Singh says:

    Wouldn’t it be most efficient to allocate his money to a foundation that already happens to be specialized in charitable giving?

    The whole “changing the world” thing, helping the poor by throwing money at them won’t do much towards that goal. Why not donate to cancer research?

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  6. Dormilon says:

    I find this immensely interesting!

    But why do I feel as though this so often tends to be more about the contributor and less about the recipient? Also, I sense the indisputable assumption that the missing ingredient in most (if not, all) social woes is money. Fascinating.

    If the poor/less educated/mentally ill/abused/addicted/homeless had money…

    So, stepping in to save the day is a financially successful individual who seems to believe that the ambitious pursuits that led to his success have actually made him a better person. And now it’s time to impart the benefits (consequences) of his financial gain, which, presumably, will lead to better people and communities.

    Whoa! This represents a shocking misunderstanding of self-worth and the roots of most social challenges in America. Of course, he could simply adopt a family and pay for every bill, every debt, the family incurs. And what, precisely, would that accomplish?

    Or he could buy a school, a library, or a free laptop for every child…but again, the point is missed. Somehow, I fail to see the connection between this charitable soul’s wealth and the real solutions that lead to stronger families, better education and more cohesive communities.

    Again, it just feels more like an opportunity for wealth to extend its footprint for its own sake. And this myopic approach is consistently validated by the mainstream media and charitable organizations that survive on this frenzy.

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  7. MBirchmeier says:

    I’m curious how much ‘overhead’ is required to get that family the $20.

    Finding a family, managing expectations on both sides. Developing an adequate plan. Education for how to use the money effectively etc.

    I’d estimate that ‘loss figure’ for donor education at about 50% (if I understand the concept correctly) is actually low when starting out toward new charitable endeavors.

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  8. dev says:

    Given what Sudhir says above, I wonder which is “better”, splitting say $500 between 10 families ($50 each), or giving the $500 to one family to cover the rent for a month or two.

    Of course you have to define what “better” is. You could look at it from a pure utility or efficiency angle, or a psychological angle. From the utility perspective, it seems kind of like playing a roulette wheel; you can spread your bets to lower the risk of money being used improperly but expect less “reward” (in this case, net benefit to the family), or stack your chips on one number and take a big gamble. Of course maybe collectively each of those family can stretch a small amount of money better then one particular family can stretch a lot of money. People’s spending habits probably change with different amounts of money available to them.

    Psychologically it gets a bit murkier (as it always does). There is a lot to be said for changing one or a small number of family’s lives completely, but there is also an undeniable lure to “change the world” type missions. After all, you don’t get statues and buildings and streets named after you for changing a few family’s lives, but you would if you solved AIDS in Africa or eliminated poverty in Chicago. It’s much harder to make a dent in these things however, and you may end up having very little impact or see little results in proportion to the resources poured in. You have to strike a balance between being ambitious and being fruitless, and I’m curious to see how Michael deals with that problem.

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