My question for you, David, is whether your fear of failure rises to the level of risk aversion. I imagine that you would be quite upset if a project you funded underperformed, and quite pleased if it overperformed. Would you be more upset about failure than you would be pleased about success?

If not, it seems that you should simply donate to maximize expected value. If so, diversification could have benefits.

In the realm of personal finance, it makes sense to me that losing $X is more damaging than winning $X is helpful. In the realm of charity, though, it doesn’t make as much sense to me. Risk preferences are personal values, but I have a little trouble seeing why one would be risk-averse in this way.

Note that we’re talking about the effect of risk-taking on aid recipients. If the donor has a personal need to see changes attributed to his or her contributions, then a different calculus applies and the donor should become risk-averse. Presumably this accounts in some part for the donate-to-everything strategy, whereby the donor gives $20 (and no more) to any charity who asks.

If we’re focusing on aid recipients, it’s not clear to me why the size of the gift as a percentage of donor’s income should matter. If you are giving $1000, why does it make a difference if it’s your life savings or if you are a millionare? Donation size as a percentage of the total donations to the recipient project type seems to me to be a more relevant measure.

As far as evaluating the success of charities’ impact, the reason that GiveWell exists is that it’s really hard to tell. Diversification doesn’t really change that, however; it’s still the optimal strategy to pick the best charity you can find and give them everything. Even if you find two charities to be indistinguishable, there’s no difference to giving to one versus splitting your donation to each.

If I’m missing something, maybe you can explain further what you mean by your second-to-last paragraph.

My perception on “umbrella organizations” is that they make giving harder, not easier. In order to understand the organization, you now have to understand every one of its programs, which is considerably more effort. If your goal is to delegate away the task of finding the best charities, then you’re better off giving to the clear fund.

However, if one is giving away a substantial portion of one’s income (10%, 50%), it’s harder to be cavalier about the possibility of failure. Ian, in your example I would be quite disappointed if my de-worming project failed. I would be happy about the success of curing Malaria, but that would have happened regardless of me. I would bitterly regret my own choice and wish I had supported something else.

Also, it’s hard to put your way of thinking into practice. Example: has the field of philanthropy overall been successful in 2009 or in the past decade? I’m not aware of any good way to tell. However, for carefully chosen recipients, e.g. GiveWell top charities, I expect GiveWell will tell me if they’ve been successful or not.

Finally, if we are uncertain about our estimates of value, and our prior is that people’s estimation errors are correlated, then the optimal individual policy is some degree of diversification.

One way to address these issues and get donors to give in a more risk-neutral way is for donors to give to an umbrella organization who can then report on the success of their portfolio. Of course, the umbrella organization should be fully open and transparent about their processes.

Abstractly, I agree with Andrew’s framework. In practice, maximizing the impact of “each marginal dollar” can mean giving to many different places, if you’re giving so much that you hit diminishing returns with any one place. However, for an individual donor giving under $250,000, it seems likely that the highest-impact gift is a single concentrated gift to a proven, cost-effective, scalable charity.

In finance, it’s important to diversify because you don’t want to get pesonally hit by changes in the price of a particular asset. If, for example, you put all your money in ANCI one year ago, then today you would discover that you had lost 70% of your holdings, which would seriously impede your personal savings goals.

Just because you lost 70%, however, doesn’t mean that the endeavor of finance was in trouble during this time: The NASDAQ, for example, was up 42% in the last year.

I think you can start to see the difference with philanthropy. Taking the same numbers, if your personal donation yielded a social return of -70% (i.e., most of the money was wasted), but the field of philanthropy overall was successful, then that would be a huge triumph. For example, I don’t think you would care if your particular de-worming project failed but Malaria were mostly cured during the same time period.

So the lesson here is that diversification is important in finance to protect individual investors from an atypical loss, but in philanthropy we don’t really care whether public improvements come from one donor or from many. Thus diversification is not so important.

Let me know if this wasn’t clear or if I missed something.

Cheers,

–Ian

Doesn’t the same reasoning apply for philanthropic giving?

It’s the larger funders that are more likely to have good reason to “diversify,” because they can’t effectively spend all their money on the most important problem (and because different programs may contribute to each other). But even these funders do not have enough to fund everything they’d like to, and so they must triage to some extent.

If on the other hand, I have a LOT of money (like Bill Gates), then I agree with you completely - spreading the money everywhere is a waste because you could potentially move the needle on something by focusing. This is the essence of having a strategy - choosing what NOT to do. Larger donors too often throw a bit of money at a ton of things and have nothing to show for it (though I suppose the largest donors, like Gates, can afford to have MULTIPLE strategies…).

The quote from Sachs gets to an even higher level - the field of donors. And I think we get fuzzy again. I’d say HIV/AIDS is “overfunded” compared to something more cost effective like de-worming or vaccinations, but I don’t think that HIV/AIDS should get NO money, nor do I think that’s what you’re suggesting…or is it? da da daaah…

@David J - completely agree - I think this is more about a better resource prioritization rather than strictly triage.