1. “90c of your dollar goes directly to building cars. Only 10% of our expenses go into planning and designing them.”

2. “We’re using a volunteer director and no advertising, so we can spend 100% of the movie’s budget on shooting expenses. It’ll be a hit!”

3. “90% of our military budget goes directly to soldiers and weapons. We don’t waste your tax dollars on administrative costs.”

4. “More than 90 percent of our expended resources … support our poverty-fighting projects around the world. Less than 10 percent of expended resources go toward administrative and fund-raising costs.”

The answer, of course, is #4, because it’s real. But to hear me tell it, it’s as silly a “selling point” as the others.

Efficiency is great, but who the heck came up with the idea that efficiency means low “administrative expenses”? When I think of what’s included in administrative expenses, the following jump to mind:

• Salaries for executives
• Technology infrastructure
• Self-tracking and -evaluation

For-profit companies spend boatloads on all of these things, and it isn’t because they’re being extravagant–it’s because these things are cost-effective. When you’re doing something complex and difficult (like, say, trying to improve the lives of Africans who suffer from a host of interrelated problems), you need to get great people and keep them happily employed, you need to have good tools to leverage their skills, and you need to be stepping back and looking at what you’re doing and how you can improve it.

A theme we have already hammered on ad nauseam, and don’t intend to stop, is that in giving as in everything else, It isn’t just how much you spend–it’s how you spend it. And that means that the people, tools and processes that can help you spend more intelligently are worth quite a bit of expense themselves.

This isn’t just a hypothetical/abstract argument about how the Straw Ratio can mislead you. This is the product of our experiences and frustrations with organizations that we find to be disorganized, technologically behind, and incapable of producing any details about what they do and whether it’s working. The obsession with the Straw Ratio goes beyond Charity Navigator: there is a pervasive attitude that nonprofits need to get all their money right to the needy, and do all their administration on the cheap. No one thinks a business should be run this way, but it’s conventional wisdom in the nonprofit sector, and the result is that the groups you’re paying to accomplish great things are trying to do them without good technology or good people. Examples of both to come.

I’m spreading my rant against the Straw Ratio across a few posts, because (a) I have a lot to say; (b) this idea is really central to what we’re doing.

Let’s start with an observation so obvious that you’re going to get mad at me for being patronizing. There is a lot you need to know about a charity besides its Straw Ratio. For example, if 99c of every dollar you give to Love the Children International goes directly to children in need (a common way of citing a strong Straw Ratio), but the specific way in which it goes to children in need is that it funds a team of singers that sings ’80s hits to them, this isn’t necessarily the best possible use of your donation.

Of course, I’m not aware of any charitable program devoted to singing ’80s hits. But I’m aware of many whose stated missions are vague enough that they may well encompass this. Some popular examples off the top of my head: one, two, three. I’m also aware that for many of the strategies I do understand, the effectiveness is far from clear. An example that jumps to mind is organizations like AmeriCares and Direct Relief International, which distribute medical supplies to areas in need, but (perhaps in pursuit of a high Straw Ratio) appear to do zero tracking of what happens to the supplies once they arrive (even though they are often arriving in extremely dangerous, disorganized areas).

So it isn’t enough to know how much of your dollar goes to programs–you need to know what the programs are. This might seem obvious, but I think it’s often overlooked. I think this because when I ask charities for budget info and evidence of their effectiveness, I often get a pie chart showing how much of my dollar goes directly to program expenses, and nothing else. And when I ask for more, I often get confusion as to why I would want anything else. Keep in mind, these are large charities, frequently with vague and all-encompassing mission statements and always with more than one major program. I want to know what they’re doing with the money. They think it’s enough to show me that they’re doing something.

If the need to know more than the Straw Ratio were obvious to everyone, this wouldn’t happen to me. If it were obvious, there wouldn’t be such a hubbub about Charity Navigator’s new feature allowing people to donate directly through the site–in other words, saving them the trouble of so much as visiting the charity’s website, and thereby allowing them to donate to a charity about which they know nothing other than the stated mission and the budget breakdown into program expenses, overhead and fundraising.

The fact is, I think most givers trust charities to do good things with their money. In other words, most givers are in a state of brain de-activation. Most of us wouldn’t give our best friend money without at least wanting to know what s/he’s going to do with it (and not just that s/he has good intentions). Yet many of us are ready to fork over a check to a bunch of total strangers as soon as they incorporate with a name like “Happy Smiles Worldwide.”

It isn’t enough to know that your dollars are being used with good intentions. You need to know that they’re being used on things that work. A yummy name and 501(c)(3) status guarantees neither that the people you’re funding are well-intentioned, nor that they have any idea what they’re doing. And as long as the Straw Ratio is all people look at, a good reputation and even a multimillion-dollar budget shouldn’t put you at ease, either. The only thing that tells you your money is accomplishing good is a description of what it’s being spent on and why that can be expected to improve people’s lives reliably and effectively.

This is obvious to anyone investing in a business, or lending to a friend, or buying a car (you do take it for a test drive, right?) So the only possible way that people can miss it when donating to charity is that they’re turning their brains off. And that’s exactly what I think is happening. Some of the smartest people I know turn into weak, gullible, soft-minded suckers the second the subject turns to “charity” or “giving.” And it’s too bad, because that’s possibly the area where their intelligence–not just their wallet–is most needed.

Tune in next time as I move on from “The Straw Ratio isn’t enough information” to “The Straw Ratio is misleading information.” I believe that a good Straw Ratio can be a bad thing–and in today’s climate, it generally is.

If what I’m saying is obvious and boring you, just fill in the arguments yourselves (comments) and I’ll go back to complaining about corrective surgery organizations.

Note from Elie: I don’t stand by this post, and it’s been left up only as a matter of historical record.

This post was made very early on in GiveWell’s history, when GiveWell was a part-time project and Holden and I saw the blog as a place to experiment, have fun, give exaggerated versions of our thoughts, etc. The blog has since evolved to focus more on clear communication on issues important to GiveWell, but early posts should not be interpreted in that light.

I value the welfare of animals significantly, though less on a per-individual basis than the welfare of humans.

See also Holden’s April 2010 followup on this post in the comments below.

The Charity Navigator blog, and this post in particular, is a great resource for the conventional view of charity. What makes me say that? Trent Stamp writes about a Scottish charity that created an ad campaign criticizing (and that’s putting it delicately) people who give to animal-charities when there are poor people who are in need. Here are some excerpts from his latest entry:

I’m not saying that I necessarily agree with the sentiment here, and I’m even less sure that it’s a good idea for charities to start bashing other charities missions or to try and steal their donors.

I really don’t understand why anyone would waffle on this issue because it seems incredibly clear. In case anyone forgot, we eat animals; we use them for hard labor; we keep them as pets. We don’t generally assign animals the rights to life, liberty, and the pursuit of happiness. Why? Because they’re animals. Supporting organizations which help people over organizations that help animals seems like an incredibly easy choice, and I don’t know why anyone wouldn’t “agree with the sentiment here.”

When you start telling people that some charities are more important than others, you run the risk of losing your supporters when someone convinces them that their cause is worthier than yours.

This is the conventional view of charity – don’t criticize others because they may criticize you, and your cause may lose support. But, why is everyone so afraid of criticism? Perhaps, through criticism, some organizations will go under, but it will be because they’re not as good. And perhaps, through open debate and criticism, the best organizations will prove themselves. Wouldn’t that be terrible. And maybe, just maybe, a few more people will live happy lives and a few more animals won’t. I think I can live with that.

Plus, based on their popularity in this country at least, picking on the animal charities and their supporters might not be the most brilliant strategy around for those who want to stick around for the long haul. Those people don’t play.

If we criticize those who choose to give to animal charities, they may stop giving altogether. Well, that may be true. And, if it is, I don’t think it’s that big of a loss. We’ll return to this topic later, but a central tenet of the conventional view of charity is that giving is good in and of itself; that’s wrong. Giving is good when it effects good. Giving to charities that help people effects good; giving to charities that help animals effects almost no good.

Let me note that there is some truth to what the Straw Man says below. There is very little information that you can get and compare across all charities, and looking at the Straw Ratio (program expenses / total expenses) is probably the single quickest, easiest way to spot the worst of the worst (i.e., Lighting Your Cash On Fire International).

There are a surprising number of charities that fall into the “lighting your cash on fire” category. Websites like Charity Navigator, which evaluate huge numbers of charities using these simple metrics, provide an extremely valuable service to society. They help expose and avoid the worst of the worst, and it’s also worth mentioning that this filter (and the categorization they do) makes work like ours feasible.

To read about the worst, read the Charity Navigator blog. It’s good reading, and eye-opening. But when you’ve knocked out the crooks, you still need to separate the well-intentioned and effective from the well-intentioned and ineffective. For this, the Straw Ratio is useless and even destructive. In the coming weeks, I will go into a lot of detail on why. Right now I’m hungry.

Hi there. I’m the Straw Man, and the purpose of my life is to say things that Holden disagrees with, in exaggerated ways so that Holden can tear me apart. It might not be the most glamorous job, but I’ve come to terms with myself.

So, guess what? I’m really into intelligent giving. It isn’t enough to be generous with your money–you have to make sure it’s accomplishing good. I’m a philanthrocapitalist. I believe in accountability. I like charities that are run like a business. Cool, huh?

Even cooler: I have solved the problem of how to do intelligent giving easily! I have devised a single number–breathtaking in its information content, stunning in its simplicity–that totally tells you what you need to know about a charity, and you can calculate it off data that’s publicly available for every charity in the U.S. Awesome? Are you ready to hear my secret formula? Here it is:

Take the money a charity spent on “program expenses” (designated on its required IRS form 990). Now, divide that number by the charity’s total expenses for the same year. Pow! Now you know how much of your dollar they will actually spend accomplishing good! What a number! I will call it the Straw Ratio.

A couple examples will demonstrate the frightening power of the straw ratio.

1. AmeriCares is a gigantic charity that takes donated medical supplies and delivers them to local organizations. Last year it spent over $1 billion, less than $7 million of which was on overhead, for a near-perfect Straw Ratio of 99.4. Good luck finding a better charity than that!

2. Interplast seeks to provide corrective surgery to people with deformities, through a combination of missions (sending surgeons overseas) and measures to build local capacity, including training and operating local centers. Last year it spent $3.6 million total–but $350,000 of this was on administrative overhead, and another $500,000 was fundraising. The Straw Ratio tells us that for every dollar you give, only about 77c are going to charity. Pretty fishy if you ask me.

This is an awesome number, so it’s no wonder that independent charity evaluators focus on it, from Charity Navigator (the biggest of all) to American Institute of Philanthropy (whose criteria are strikingly similar to Charity Navigator’s, hmm, actually, they seem identical) to the BBB Wise Giving Alliance. And no wonder that charities with high Straw Ratios love to put this info front and center, and those with truly innovative minds–here and here–even manage to achieve PERFECT STRAW RATIOS! Roll that around in your brain for a second. I guess these organizations neither fundraise nor administrate . . . and that means every penny is good!

There couldn’t possibly be any objections to this, right?

I understand that a lot of you have been sitting on the edge of your seats, wondering when GiveWell is going to recommend an organization for fighting diarrheal illness. Your wait is over.

My research on diarrhea began as an interest in the cause of “water.” It’s a very popular cause, and a very marketable one: hard to argue with the idea of giving people water. In my research, the first thing I learned was that the main problem of “water” is lack of clean water (not lack of access to water entirely), and that the main thing contaminating the water is fecal material. And the main problem caused by this, in turn, is diarrhea so severe it can actually lead to death by dehydration.

But the problem goes well beyond water. People lack access to adequate sanitation facilities, as well as sanitation education. Fecal matter gets everywhere (their hands, their food, and their water), and all of this contributes to the death toll of diarrhea.

Even though there are a few cost-effective strategies for reducing diarrheal illness, most of the organizations with which I spoke focused on expensive approaches, something that both former Secretary of the Treasury Paul O’Neill and I find confusing and frustrating. Part of the issue may be that focusing on clean water is more marketable–but less cost-effective–than focusing on the root problem, diarrhea.

But then, I investigated Population Services International. PSI is a large ($260 million budget last year) organization focused on basic health issues in the developing world. To reduce diarrheal illness, they offer Oral Rehydration Therapy (ORT) and water purification at point-of use. Uniquely, instead of distributing the products for free, they sell them through local vendors allowing them to recoup some of their production costs and reduce distribution costs. We estimate that PSI’s ORT program saves lives at less than $50/life. Holden’s made a big deal about numbers like this before (he did grossly understate ORT’s cost at 5c/life), but $50/life is hard to process. $50 … per … life. Jeez.

Along with its focus on the most cost-effective strategies, I’m a big fan of PSI’s evaluation approach – they keep careful records of exactly how much ORT and water-purification solution they distribute and have a research department devoted to evaluating PSI’s work.

Now, PSI isn’t perfect. It didn’t give me a detailed breakdown of its total budget – its diarrheal illness programs only make up about 2.5% – and it doesn’t comprehensively or systematically evaluate each program. Also, it’s been relatively difficult to get information from PSI, even after I made a reasonable donation.

Right now, I’m working on the review, which should be up on GiveWell in the next week.