Charity “Shoppers” vs. Charity Investors

(Photo: Howard Lake)

(Photo: Howard Lake)

I like Indian food more than sushi. And I like sushi more than Italian food. When going out for dinner and choosing which to eat, does this mean I always choose Indian? Of course not. I’d tire of Indian food.

On my savings account, I like earning 3% interest more than 2%. And I like earning 2% more than 1%. Suppose three banks offer accounts identical except for the interest rate: would I always choose the 3% account? Or might I say, “Hey, 3% is boring, I think I’ll try 2%?” Of course not. I’d stick with the bigger payoff.

Yet when it comes to charitable giving, most people spread their money around. Why is this? And is it an effective strategy for helping people, or just a way to make ourselves feel good?  

I look at this three ways:

First, we might think that even the best charity can absorb and wisely spend only so much money — that the impact of our next dollar is lower than the impact of the first. So we give to several worthy causes. And this may be the prudent approach for huge givers like Bill & Melinda Gates, Mark Zuckerberg, and Warren Buffett — but most of us don’t have to worry about that.

Second, it’s possible that we think of giving as a form of investing and we want to diversify risk. Maybe we’re willing to take a lower average expected return on “investment” in exchange for greater confidence that our donations will, on average, make an impact, or that at least one investment will. Surely this can be driven by genuine altruism (and perhaps a bit of risk aversion): we really want to make sure that we’re helping.

But I suspect this is all mere rationalization, and that, we really divide our charity for a third reason: giving is more like consumption than like investment. We give because it makes us feel good.

(And, for the math-geeks among us, the warm fuzzies we get from giving isn’t linear with the amount given —  we get more warm fuzzies from splitting our gift between two charities, or among three or four or more.)

But there are real costs to this approach: It’s inefficient, and we might not be giving to the most effective programs.

We also sometimes give because our neighbor, friend, or work colleague pressured us to give. And so we did, to make them happy, or to win a favor from them in the future.

Either way, this means we are giving not due to altruism, but for ourselves.

If we think of ourselves as savvy investors in humanity, looking for the highest return on our charitable “investment” — that is, the most help for the best charities — where should we put our money?  Here are some ideas. (Fair warning: researchers at the non-profit organization I founded, Innovations for Poverty Action (IPA), conducted scientific evaluations of these organizations as part of its mission to discover and promote effective solutions to global poverty.)

The non-profit Pratham learned (and showed others) that poor children who were behind in school could be brought up to speed using a decidedly low-tech approach: giving unemployed women in the village a crash course in teaching and turning them into volunteer tutors.

The organization Seva Mandir knew that vaccinations are incredibly important in the developing world, but that it can be difficult to get people to come to vaccination drives. They showed that giving out a bag of lentils as an incentive to mothers who bring their children not only boosted vaccination rates, but that the increased coverage lowered total costs, even taking the cost of the lentils into account.

A brand new addition to the list is Evidence Action, which was recently founded as a spinoff from Innovations for Poverty Action and is dedicated to scaling up programs backed by evidence of their effectiveness — such as those providing communal chlorine dispensers for treating water and inexpensive anti-parasite pills for children in the developing world.

Against Malaria Foundation (AMF) distributes bed nets to help protect children and pregnant mothers from malaria. There once were debates about whether bed nets should be sold or given out for free. But careful scientific tests by IPA researchers have shown that giving them away expands coverage effectively, with no evidence of the feared “sunk cost” effect, in which people do not use items acquired for free.

Two microfinance charities stand out for their innovative work to improve the microfinance model, (which in my view has not sufficiently proven itself to merit charitable donations, particularly since it can attract investment capital) — Freedom from Hunger and Kiva Labs. These groups are working hard to innovate, and to document their results scientifically. Freedom from Hunger helps people learn to save, so they don’t need loans and can independently generate the means to invest in their own futures. Kiva Labs helps promote and finance more flexible lending products.

It can be hard to sift through competing claims of charities — this is why I believe in setting up objective tests to help organizations know what works and help donors know what to support.

All this said, and despite knowing what I should do, I give to multiple charities. I’m only human. But I try to remember that, just as buying a pair of shoes I don’t really need comes at the cost of supporting a good cause, supporting an okay-but-not-the-best cause also comes at the cost of supporting a better one. It’s economics 101: Everything has a tradeoff. Choose the best charity you can.

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  1. Sam says:

    My wife and I tend to be more like investors in are charitable giving, but we have mutiple interests. We have identified core areas of concern and we then try to evaluate organizations that are working in the same are based on their success and efficiency in that particular cause. We may also look at root causes and then choose to support those organizations that address both symptoms which need immediate relief as well as root causes which will have a longer-term “return.”

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  2. Bill says:

    The three ways you look at the issue don’t include wanting to help more than one organization/address more than one issue. The best charity I can find: if it doesn’t miraculously address poverty, medical research, local programs, children with special needs, and spiritual issues, all in the places where I want to see stuff done, well, then, I’m spreading my charitable money around. I don’t know why you see altruism as incompatible with feeling good or helping others in what might not be the most efficient way? Surely you don’t think helping others only counts when that’s all you care about? I don’t see why charities that do good and address issues, but perhaps not as well as others should suffer — if they’re doing things others aren’t doing in the same way, they can get support. Really, it seems you’re plugging groups for issues you care about. Not sure how that’s different than friends pressuring friends, except that you’re a complete stranger.

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  3. Mark says:

    This ignores the fact that people may want to give to several charities because they focus on different things. While possibly related to the ‘feel good’ rationale you propose, I think it is different. I may very well think that it is better to give 33% of my charitable dollars to three causes that are distinctly different.

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    • Enter your name... says:

      I think that’s the big issue here. The rational economic view is to say, “Now let’s see: I’m going to give away US $100. With that money, I can alleviate $142 of suffering by giving it to Charity 1, which happens to be a health outfit, or $139 of suffering by giving it to Charity 2, which happens to be an education outfit, or $127 of suffering by giving it to Charity 3, which happens to be a food bank.

      But that’s not how people think about it. They say, I want to do something about food insecurity. Comparing hunger-related organizations against only other hunger-related organizations, which one of these should I give this money to?

      Then they say, I also want to do something about education. Comparing all the education-related organizations, which one of these should I give money to?

      So the result is that deliberate donors give only to the best food bank they can find, and only to the best education program they can find, and only to the best health-related charity they can find—but they still give to more than one charity, because they don’t see the different groups of charities as being interchangeable.

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  4. Erik says:

    Charitable giving isn’t a homogeneous market and I feel like that’s how it’s being looked at. How it should be looked at is it’s an Industry, and within the industry there are different markets. Animal Rescue, Educational, Spiritual, Poverty, etc. etc. I’d be more interested in seeing an in-depth analysis and see if one particular market of let’s say: education in third-world countries (market) has people spreading money around to multiple organizations or if they stick with one. Otherwise,it seems like this research is really missing the target entirely.

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  5. Alp says:

    Spreading money across charities invokes transaction costs, and for what? Diversifying risk is prudent only insofar as you eant to hedge against scenarios where your wealth or consumption patterns will be negatively affected. At mortal levels of earnings and giving, none of this matters (individually) to a charity.

    I think the real objection here is that we cannot take ceteris paribus: different pattrns of giving lead most of us to give different total amounts. Maybe most people don’t have the discipline nor perhaps special madness to be risk-neutral minmaxing robots. Also, the article has too narrow a view and too strong a presumption about the motivations behind giving.

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  6. Voice of Reason says:

    It might be because people hate to say “No” more than they like to take control of their own charitable giving. This isn’t meant as a criticism at all, but I think that giving has to do with who solicits at the right time. People might not think about donating to a certain cause on their own, but they hard pressed to turn people away when they ask.

    It’s like girl scout cookies. You know during girl scout season you’ll asked by a lot of scouts and their parents if you will buy from them. To not seem like a scrooge, you want to buy from all of them. That means that you don’t buy 10 from one person, but you’ll buy one from each.

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  7. Julien Couvreur says:

    While I agree with your observation that charity giving can be like consumption, I am confused by your opposing giving to charity out of altruism versus self-interest.

    “Either way, this means we are giving not due to altruism, but for ourselves.”

    The reason I am confused is that if a person gives, then that person demonstrates a preference for this action over alternatives. In other words, giving satisfies the person more than other actions.
    In what sense can this be called altruism then?

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    • Julien Couvreur says:

      I’ve been thinking about this more since this morning.
      He’s a possible clarification of the categorization: charity is consumption to the extent that you care about what you spend (giving more and to many distinct causes is what makes you feel good), but it is investment to the extent that you care about the results/returns/benefits for others.
      The later may be what you incorrectly labelled altruism.

      In that sense, “fire and forget” charity would most likely fall in the first category. The question is then, how do you encourage givers to follow through and monitor whether their donations were effective?
      When it comes to most investments, there are not only metrics (how many units sold, etc), but also returns/dividends which are proof that the investment was not wasted (value produced is more than value invested, otherwise it’s a loss). But how do you know if investment in a charity is wasted, aside from the typical metrics (how many meals served, nets delivered, books distributed)?

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  8. Julien Couvreur says:

    I agree that it is tempting to spread donations.
    As a side note, maybe we should have an app to assist people allocate their donations: you would input how you would want to donate, then the app outputs how you should donate. The effect is the same overall but the overhead is minimized, across many users.

    But going back to the main question, how would things work if people were concentrated givers?
    What are examples where giving sufficiently to a single cause led to the cause being resolved for good, thus allowing people to switch their donations to the second problem on their list?

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