It’s a truism in the efficient charity community that when giving to charity, we should find the most efficient group and give it our entire charity budget; the common practice of spreading donations among groups is suboptimal. However, in investing it’s considered a good idea to diversify. But it seems that giving to charity and investing are essentially the same activity: we are trying to get the highest return possible, the only difference is who gets it. So why is diversification a good idea for one and not the other?
It’s a truism in the efficient charity community that when giving to charity, we should find the most efficient group and give it our entire charity budget; the common practice of spreading donations among groups is suboptimal. However, in investing it’s considered a good idea to diversify. But it seems that giving to charity and investing are essentially the same activity: we are trying to get the highest return possible, the only difference is who gets it. So why is diversification a good idea for one and not the other?
If you are attempting to maximise expected returns from your personal investment you would not diversify (except within resources that have identical expected returns). However with personal investments you have some degree of risk aversion. That is, you don’t value money linearly all the way from 0 to $10,000,000 and so splitting the investment between multiple stocks gives higher expected utility even though the expected returns in $ will be slightly lower.
This differs when it comes to charitable giving because it is assumed that your personal donations aren’t sufficient to change the marginal utility significantly. Personally owning $10,000 rather than $0 is much more useful than owning $20,000 instead of $10,000 but after you give $10,000 to The Society For Cute Puppies And Mosquito Nets the value of giving another $10,000 to TSFCPaMN has probably barely changed at all. Diversifying becomes important again when you have enough financial power to change the margin all on your own.
You’ve pinpointed it: the only difference is who gets it. When investing, diversification as the receiver of the return is useful because you’d rather gain slightly less than often lose everything. When … living, diversification as the receiver of the return is useful for the same reason.
When investing, you’d like your buyers to diversify… but there’s only one buyer, so that buyer needs to diversify. But when giving charitably, the world would like its buyers to diversify, and there are lots of buyers. Assuming its buyers are sufficiently independent, the world gets enough diversification just because its buyers make different decisions. So as long as sufficiently many people make different charitable giving decisions than you, feel free to buy only what you think are the most efficient charities.
The world doesn’t care how much you help it, the world only cares how much it gets helped overall.
I’m not sure if the arguments for diversification in investments actually apply to charity. You want to diversify your investments because you’re risk averse. I would not, for example, bet $1000 on a coin flip; losing $1000 is more painful to me than gaining $1000 is pleasurable. In other words, your utility is not linear in money in your bank account.
However, for charity, I think it makes perfect sense to have linear utility in money donated to charity. If you value saving two lives twice as much as saving one, and the cost per life saved is constant, then you should value each dollar given to charity as much as the last. Given that, you shouldn’t really care about variance; you can focus on expected returns. As such, I don’t think you should diversify charity donations at any scale, personal or on a worldwide scale; just donate to the most efficient charity, and then when that charity becomes less efficient, donate to the newest most efficient.
It seems true that when investing, you’re trying to get the highest return possible, in terms of a single value measured in currency.
I’ve never understood why it should also necessarily be true with charity. It seems often to be an unexamined assumption, and may be reinforced by using terminology like “utilons” that appears to be begging the question.
Someone who donates both to the mosquito nets effort in Africa, and to the society which helps stray dogs and cats in Michigan, is not necessarily being irrational. They just may be perceiving the two benefits to lie on incomparable axes. They may be caring about helping Africans and helping stray dogs simultaneously, in different ways that are not exchangable to each other. The familiar objection is: “Sure they are exchangable; everything is exchangable into utilons; if you don’t see a clear rate of exchange for your own preferences, that just means you still ought to estimate one given your imperfect knowledge, and act on it”. But I don’t see why that should be true.
Certainly most of our spending is done on axes that are incomparable to one another. We have needs along those axes that we do not normally consolidate to one “most efficient” axis, even after the minimal requirements are met. Investing is the activity that’s the odd one out, here—and one of the reasons it is is precisely that we don’t care much which of the companies we invest in brings us profit. It seems odd that charity should so unequivocally stand along with investing as an exception.
If charitable giving is not an exceptional way for us to spend money, the idea of a single currency becomes difficult to support, because if charity must be so streamlined, why not all other activity? In other words, sure, you can criticize someone for helping stray dogs by saying their money could be saving lives in Africa instead; but is that very different from criticizing them for buying a large color TV, when their money could be saving lives in Africa instead?
Charity falls in the same category as investing to the extent that you care about the effectiveness of the different charities (as opposed to feeling good about yourself, for example). Here’s why.
For the sake of simplicity, suppose that you have $2000 to give to charity, and $1000 can either save a child in Africa or a dog in Michigan. For now, we assume that you care about the number of children and dogs saved.
If the charities currently have enough money to save 999 dogs and 999 children, then preferring an even split to a $2000/$0 split means preferring 1000 dogs and 1000 children saved, to 1001 dogs and 999 children. Nothing wrong with this, by itself.
However, we aren’t precisely certain about these numbers; and if the charities have enough money to save 1000 dogs and 998 children, then preferring an even split to a $0/$2000 split reveals exactly the opposite preference. This is a problem.
In general, as long as our uncertainty about how much the charities are doing is much greater than the impact of our own donations, a similar thing happens. It’s easy to have enough information to prefer a $2000/$0 split or a $0/$2000 split above all: for instance, if you think it’s best to have 1000 children and 1000 dogs saved, and currently there’s money to save about 500+/-100 children and 1500+/-100 dogs, you should definitely donate all your money to the children charity.
But having enough information to definitely prefer an even split is nearly impossible. The best we can do is consider the case where the difference is probably small, so you shouldn’t really care one way or the other. This is probably rare, though, and even that doesn’t argue in favor of an even split.
Now, obviously our assumption that we only care about the totals is unrealistic. But then, the usual argument runs, maybe we should figure out how much we care about the totals, and efficiently distribute that portion of our money (most likely, only to one charity). After that, the remaining money can go to making yourself feel good about yourself, or to signaling that you care about dogs, or whatever.
Notably, argument says nothing about color TVs, because you’re certain of the exact impact: you definitely go from 0 color TVs to 1. If we had that much information about the impact of charity, maybe even splits would more often be a good idea.
Someone who donates both to the mosquito nets effort in Africa, and to the society which helps stray dogs and cats in Michigan, is not necessarily being irrational. They just may be perceiving the two benefits to lie on incomparable axes.
If you decide that donating 1$ to mosquito nets and 1$ to stray dogs is better than 2$ to one or 2$ to the other, then you have in fact performed a comparison between those three actions. If the type of good generated by mosquito nets is one axis and the type of good generated by saving stray dogs is another, then the scalar-valuedness of utility isn’t about the axes, it’s about comparing any given point in that 2-D space with any other point.
The alternative to being able to compare things isn’t some decision process other than comparison. The alternative is to not have preferences about the state of the world at all; to say that there is no such thing as a “right thing to do” in a given circumstance.
then… it’s about comparing any given point in that 2-D space with any other point.
Granted, preferring one particular 2D point to another may be read as running a scalar-valued comparison function on the 2D space (such a reading is not without problems, e.g. because real people’s preferences may not be transitive, but let’s ignore those details). However, from the existence of such a function it does not follow that “we should find the most efficient group and give it our entire charity budget”—this being the claim the universality of which I was contesting.
From the existence of such a function it does not follow that “we should find the most efficient group and give it our entire charity budget”
Agreed. To derive that you would also need a smoothness constraint on said function, so that it can be locally approximated as linear; and you need to be donating only a small fraction of the charity’s total budget, so as to stay within the domain of said local approximation.
I assert that the smoothness property is true of sane humans’ altruistic preferences, but that’s not something you can derive a priori, and a sufficiently perverse preference could disagree.
To derive that you would also need a smoothness constraint on said function, so that it can be locally approximated as linear;
You’re solving essentially a global optimization problem; what use is (the existence of) a local linear approximation? If the utility function happens to be the eminently smooth f(x,y)=xy, then under the constraint of x+y=const the optimal solution is going to be an even split. It’s possible to argue that this particular utility function is perverse and unnatural, but smoothness isn’t one of its problems.
You don’t even need contrived examples to show that utility functions do not admit their maxima along one axis. My other point was that charity may not be easily distinguishable from other types of spending[1], and our normal utility functions definitely don’t have that behavior. We do not, among different types of things we require/enjoy, pick out the “most efficient” one and maximize it alone.
[1] As another example of that thesis, consider the sequence: I buy myself a T-shirt—I buy my child a T-shirt—I pool funds with other parents to buy T-shirts for kids in my child’s kindergarden, including for those whose parents are too poor to afford it—I donate to the similar effort in a neighbouring kindergarden—I donate to charity buying T-shirts for African kids.
then under the constraint of x+y=const the optimal solution is going to be an even split.
Yeah, but unless you actually end up at that point, that’s hardly relevant. If people donated rationally, we would always be at that point, but people don’t, and we aren’t.
and our normal utility functions definitely don’t have that behavior.
We’re normally only dealing with one person. If you play videogames, you quickly get to the point where you don’t want to play anymore nearly as much, so you do something else. If you save someone’s life, there’s still another guy that needs saving, and another guy after that, etc. You can donate enough that the charity becomes less efficient, but you have to be rich and the charity has to be small.
Also, consider: If you wanted a shirt, and I bought you one, you’d stop wanting a shirt and spend your money on something else, just like if you bought the shirt. If you wanted to donate $100 to X charity, and I told you that I already did, would you respond the same?
Yeah, but unless you actually end up at that point, that’s hardly relevant. If people donated rationally, we would always be at that point, but people don’t, and we aren’t.
I don’t understand how what you just said relates to my example. To recap, I meant my example, where the maximum is at the even split, to refute the claim that any smooth utility function will obtain its maximum along one “most efficient” axis. The whole argument is only about the rational behavior.
We’re normally only dealing with one person. If you play videogames, you quickly get to the point where you don’t want to play anymore nearly as much, so you do something else. If you save someone’s life, there’s still another guy that needs saving, and another guy after that, etc.
While this is true, and does point at an interesting difference between charity and many other behaviors, it can’t isolate charity, not by a long shot. There are many, many things we do that we stop doing not because of satiety or exhaustion, but because of other priorities.
To give the first example that comes to mind, a personal one, I’m learning piano and I also play table tennis. I enjoy both activities immensely and would like to do either of them a lot more (but can’t because of other commitments). There’s no question of satiety of exhaustion at the level I currently invest in either. I could stop doing one of them and use that time for the other, but I explicitly don’t want do to that and consider that an inferior outcome. I don’t think this preference of mine is either irrational or very unusual.
consider: If you wanted a shirt… If you wanted to donate $100 to X charity...
Here’s a closer “personal spending” analogy to charity: I commit to putting aside $500 every month for a future downpayment on a house (a goal far in the future). A family friend gives me an unexpected present of $500, putting it right into the fund. Am I likely to forego my own deduction this month and use it for other fun things? Depends on the kind of person I am, but probably not.
Kindly’s comment gets it right. It’s not about satiety. If you’re a consequentialist and care about the total amounts of money donated to each charity, rather than about how much you donated, then the decision in favor of the equal split must be very sensitive to the donations of others like you. That’s the relevant difference between selfish spending and charity.
To recap, I meant my example, where the maximum is at the even split, to refute the claim that any smooth utility function will obtain its maximum along one “most efficient” axis.
You only control a tiny portion of the money that gets donated to charity. If there’s currently an equal amount of money donated to each charity, the ideal action would be to donate equally to each. If the difference between the amounts exceeds the amount you donated, which is more likely the case, you donate to the one that there’s been less donated to. For example, if one charity has one million dollars in donations and the other has two million, and you donate a hundred thousand over your life, you should donate all of it to the charity that has a million.
There’s no question of satiety of exhaustion at the level I currently invest in either.
I doubt that. You might still have fun doing each more, but not as much. If you chose to learn the piano before, but now choose to play tennis, something must have changed. If nothing changed, yet you make a different decision, you’re acting irrationally.
Here’s a closer “personal spending” analogy to charity:
Why is that analogy closer? It looks like it’s in far mode instead of near mode, and the result is more controlled by what’s pretty than what makes you happy. For example, if you got a $500 a month raise, you likely wouldn’t save it all for the downpayment, even though there’s no reason to treat it differently. If you got a $500 a month pay cut, you almost certainly wouldn’t stop saving.
Kind of a stupid question:
It’s a truism in the efficient charity community that when giving to charity, we should find the most efficient group and give it our entire charity budget; the common practice of spreading donations among groups is suboptimal. However, in investing it’s considered a good idea to diversify. But it seems that giving to charity and investing are essentially the same activity: we are trying to get the highest return possible, the only difference is who gets it. So why is diversification a good idea for one and not the other?
If you are attempting to maximise expected returns from your personal investment you would not diversify (except within resources that have identical expected returns). However with personal investments you have some degree of risk aversion. That is, you don’t value money linearly all the way from 0 to $10,000,000 and so splitting the investment between multiple stocks gives higher expected utility even though the expected returns in $ will be slightly lower.
This differs when it comes to charitable giving because it is assumed that your personal donations aren’t sufficient to change the marginal utility significantly. Personally owning $10,000 rather than $0 is much more useful than owning $20,000 instead of $10,000 but after you give $10,000 to The Society For Cute Puppies And Mosquito Nets the value of giving another $10,000 to TSFCPaMN has probably barely changed at all. Diversifying becomes important again when you have enough financial power to change the margin all on your own.
You’ve pinpointed it: the only difference is who gets it. When investing, diversification as the receiver of the return is useful because you’d rather gain slightly less than often lose everything. When … living, diversification as the receiver of the return is useful for the same reason.
When investing, you’d like your buyers to diversify… but there’s only one buyer, so that buyer needs to diversify. But when giving charitably, the world would like its buyers to diversify, and there are lots of buyers. Assuming its buyers are sufficiently independent, the world gets enough diversification just because its buyers make different decisions. So as long as sufficiently many people make different charitable giving decisions than you, feel free to buy only what you think are the most efficient charities.
The world doesn’t care how much you help it, the world only cares how much it gets helped overall.
I’m not sure if the arguments for diversification in investments actually apply to charity. You want to diversify your investments because you’re risk averse. I would not, for example, bet $1000 on a coin flip; losing $1000 is more painful to me than gaining $1000 is pleasurable. In other words, your utility is not linear in money in your bank account.
However, for charity, I think it makes perfect sense to have linear utility in money donated to charity. If you value saving two lives twice as much as saving one, and the cost per life saved is constant, then you should value each dollar given to charity as much as the last. Given that, you shouldn’t really care about variance; you can focus on expected returns. As such, I don’t think you should diversify charity donations at any scale, personal or on a worldwide scale; just donate to the most efficient charity, and then when that charity becomes less efficient, donate to the newest most efficient.
Now that I have read your answer, it seems obvious in retrospect. Very nice, thanks!
The difference is very simple.
Is it better to have $100,00, or a 30% chance of $1,000,000 and a 70% chance of being homeless. Obviously the former
Is it better to save 1 life, or have a 30% chance of saving 10 lives and 70% chance of doing nothing. Obviously the latter.
It seems true that when investing, you’re trying to get the highest return possible, in terms of a single value measured in currency.
I’ve never understood why it should also necessarily be true with charity. It seems often to be an unexamined assumption, and may be reinforced by using terminology like “utilons” that appears to be begging the question.
Someone who donates both to the mosquito nets effort in Africa, and to the society which helps stray dogs and cats in Michigan, is not necessarily being irrational. They just may be perceiving the two benefits to lie on incomparable axes. They may be caring about helping Africans and helping stray dogs simultaneously, in different ways that are not exchangable to each other. The familiar objection is: “Sure they are exchangable; everything is exchangable into utilons; if you don’t see a clear rate of exchange for your own preferences, that just means you still ought to estimate one given your imperfect knowledge, and act on it”. But I don’t see why that should be true.
Certainly most of our spending is done on axes that are incomparable to one another. We have needs along those axes that we do not normally consolidate to one “most efficient” axis, even after the minimal requirements are met. Investing is the activity that’s the odd one out, here—and one of the reasons it is is precisely that we don’t care much which of the companies we invest in brings us profit. It seems odd that charity should so unequivocally stand along with investing as an exception.
If charitable giving is not an exceptional way for us to spend money, the idea of a single currency becomes difficult to support, because if charity must be so streamlined, why not all other activity? In other words, sure, you can criticize someone for helping stray dogs by saying their money could be saving lives in Africa instead; but is that very different from criticizing them for buying a large color TV, when their money could be saving lives in Africa instead?
Charity falls in the same category as investing to the extent that you care about the effectiveness of the different charities (as opposed to feeling good about yourself, for example). Here’s why.
For the sake of simplicity, suppose that you have $2000 to give to charity, and $1000 can either save a child in Africa or a dog in Michigan. For now, we assume that you care about the number of children and dogs saved.
If the charities currently have enough money to save 999 dogs and 999 children, then preferring an even split to a $2000/$0 split means preferring 1000 dogs and 1000 children saved, to 1001 dogs and 999 children. Nothing wrong with this, by itself.
However, we aren’t precisely certain about these numbers; and if the charities have enough money to save 1000 dogs and 998 children, then preferring an even split to a $0/$2000 split reveals exactly the opposite preference. This is a problem.
In general, as long as our uncertainty about how much the charities are doing is much greater than the impact of our own donations, a similar thing happens. It’s easy to have enough information to prefer a $2000/$0 split or a $0/$2000 split above all: for instance, if you think it’s best to have 1000 children and 1000 dogs saved, and currently there’s money to save about 500+/-100 children and 1500+/-100 dogs, you should definitely donate all your money to the children charity.
But having enough information to definitely prefer an even split is nearly impossible. The best we can do is consider the case where the difference is probably small, so you shouldn’t really care one way or the other. This is probably rare, though, and even that doesn’t argue in favor of an even split.
Now, obviously our assumption that we only care about the totals is unrealistic. But then, the usual argument runs, maybe we should figure out how much we care about the totals, and efficiently distribute that portion of our money (most likely, only to one charity). After that, the remaining money can go to making yourself feel good about yourself, or to signaling that you care about dogs, or whatever.
Notably, argument says nothing about color TVs, because you’re certain of the exact impact: you definitely go from 0 color TVs to 1. If we had that much information about the impact of charity, maybe even splits would more often be a good idea.
If you decide that donating 1$ to mosquito nets and 1$ to stray dogs is better than 2$ to one or 2$ to the other, then you have in fact performed a comparison between those three actions. If the type of good generated by mosquito nets is one axis and the type of good generated by saving stray dogs is another, then the scalar-valuedness of utility isn’t about the axes, it’s about comparing any given point in that 2-D space with any other point.
The alternative to being able to compare things isn’t some decision process other than comparison. The alternative is to not have preferences about the state of the world at all; to say that there is no such thing as a “right thing to do” in a given circumstance.
Expected utility does apply to all activity.
Granted, preferring one particular 2D point to another may be read as running a scalar-valued comparison function on the 2D space (such a reading is not without problems, e.g. because real people’s preferences may not be transitive, but let’s ignore those details). However, from the existence of such a function it does not follow that “we should find the most efficient group and give it our entire charity budget”—this being the claim the universality of which I was contesting.
Agreed. To derive that you would also need a smoothness constraint on said function, so that it can be locally approximated as linear; and you need to be donating only a small fraction of the charity’s total budget, so as to stay within the domain of said local approximation.
I assert that the smoothness property is true of sane humans’ altruistic preferences, but that’s not something you can derive a priori, and a sufficiently perverse preference could disagree.
You’re solving essentially a global optimization problem; what use is (the existence of) a local linear approximation? If the utility function happens to be the eminently smooth f(x,y)=xy, then under the constraint of x+y=const the optimal solution is going to be an even split. It’s possible to argue that this particular utility function is perverse and unnatural, but smoothness isn’t one of its problems.
You don’t even need contrived examples to show that utility functions do not admit their maxima along one axis. My other point was that charity may not be easily distinguishable from other types of spending[1], and our normal utility functions definitely don’t have that behavior. We do not, among different types of things we require/enjoy, pick out the “most efficient” one and maximize it alone.
[1] As another example of that thesis, consider the sequence: I buy myself a T-shirt—I buy my child a T-shirt—I pool funds with other parents to buy T-shirts for kids in my child’s kindergarden, including for those whose parents are too poor to afford it—I donate to the similar effort in a neighbouring kindergarden—I donate to charity buying T-shirts for African kids.
Yeah, but unless you actually end up at that point, that’s hardly relevant. If people donated rationally, we would always be at that point, but people don’t, and we aren’t.
We’re normally only dealing with one person. If you play videogames, you quickly get to the point where you don’t want to play anymore nearly as much, so you do something else. If you save someone’s life, there’s still another guy that needs saving, and another guy after that, etc. You can donate enough that the charity becomes less efficient, but you have to be rich and the charity has to be small.
Also, consider: If you wanted a shirt, and I bought you one, you’d stop wanting a shirt and spend your money on something else, just like if you bought the shirt. If you wanted to donate $100 to X charity, and I told you that I already did, would you respond the same?
I don’t understand how what you just said relates to my example. To recap, I meant my example, where the maximum is at the even split, to refute the claim that any smooth utility function will obtain its maximum along one “most efficient” axis. The whole argument is only about the rational behavior.
While this is true, and does point at an interesting difference between charity and many other behaviors, it can’t isolate charity, not by a long shot. There are many, many things we do that we stop doing not because of satiety or exhaustion, but because of other priorities.
To give the first example that comes to mind, a personal one, I’m learning piano and I also play table tennis. I enjoy both activities immensely and would like to do either of them a lot more (but can’t because of other commitments). There’s no question of satiety of exhaustion at the level I currently invest in either. I could stop doing one of them and use that time for the other, but I explicitly don’t want do to that and consider that an inferior outcome. I don’t think this preference of mine is either irrational or very unusual.
Here’s a closer “personal spending” analogy to charity: I commit to putting aside $500 every month for a future downpayment on a house (a goal far in the future). A family friend gives me an unexpected present of $500, putting it right into the fund. Am I likely to forego my own deduction this month and use it for other fun things? Depends on the kind of person I am, but probably not.
Kindly’s comment gets it right. It’s not about satiety. If you’re a consequentialist and care about the total amounts of money donated to each charity, rather than about how much you donated, then the decision in favor of the equal split must be very sensitive to the donations of others like you. That’s the relevant difference between selfish spending and charity.
You only control a tiny portion of the money that gets donated to charity. If there’s currently an equal amount of money donated to each charity, the ideal action would be to donate equally to each. If the difference between the amounts exceeds the amount you donated, which is more likely the case, you donate to the one that there’s been less donated to. For example, if one charity has one million dollars in donations and the other has two million, and you donate a hundred thousand over your life, you should donate all of it to the charity that has a million.
I doubt that. You might still have fun doing each more, but not as much. If you chose to learn the piano before, but now choose to play tennis, something must have changed. If nothing changed, yet you make a different decision, you’re acting irrationally.
Why is that analogy closer? It looks like it’s in far mode instead of near mode, and the result is more controlled by what’s pretty than what makes you happy. For example, if you got a $500 a month raise, you likely wouldn’t save it all for the downpayment, even though there’s no reason to treat it differently. If you got a $500 a month pay cut, you almost certainly wouldn’t stop saving.
I’ve made a post with an analysis of this situation.