How do you find the best non-profits to donate to? This is an important question that is critical to effective altruism.
One suggestion comes from Holden Karnofsky at the Open Philanthropy Project, who describes a strategy called “hits-based giving”. In this framework, you make a number of investments, some of which are very counter-intuitive and against expert consensus, with the understanding that many will not amount to much but those that work will generate excess returns to make the overall portfolio have a high altruistic return on philanthropic investment.
This strategy originates from YCombinator. In the essay “Black Swan Farming”, Paul Graham argues that funding for-profit startups is the art of hunting for the one deal that will make it big. You have a lot of “misses” when you invest, but the one time you make a “hit”, it will hit big and repay all your losses and then some. In order to guess right, you have to make many gambles. YCombinator has been working on this problem since 2005, and has since invested over $170M into over 1400 different start-ups. The combined valuation of their current start-up batch is stated to now be over $80B.
“Black swan farming” seems to work well for YCombinator. But does it apply well when donating to non-profits? Does hits-based giving work? Since writing that post on April 2016, OpenPhil has already allocated over $197M according to this philosophy. YCombinator is also applying hits-based giving to their own batch of non-profits, to which they have donated $3M.
Peter also summarizes 80,000 Hours’ application of start-up principles to evaluating projects (For those unfamiliar, 80,000 Hours is the careers advising organization part of the Centre for Effective Altruism, and both 80,000 Hours and the CEA were incubated by YCombinator).
In contrast, Todd argues for evaluating early “start-up” non-profits with standard start-up metrics, such as making sure they have a high-quality product, a large addressable market, and the ability to “sell” to this market at scale. Similarly, the organization should have a good growth rate and the team should ideally demonstrate competence and have a track record. For example, GiveWell had a superior research product with the ability to scale to millions of small donors plus dozens of interested large-scale foundations. While the team did not have much of a prior track record, they showed their competence through their early research and early traction with donors.
Lastly, Todd implies that upfront, early investments in rigorous cost-effectiveness analyses are premature, as they draw attention away from growing the core product in quality and scale, and they likely focus too much on the short-run impact, ignoring long-run opportunities.
He makes a couple points relevant to your and Benquo’s observation about how non-profit investing should be more risk-neutral than appears to be the case between CEA and the Berkeley REACH.
Non-profit investing affords you the opportunity to be far more risk-neutral than you can in for-profit investing, which changes your options. Index funds are typically chosen less because the diversification increases average returns, but rather because the diversification decreases the variance of the investment, exposing you to less risk. A risk-neutral for-profit investor might be pursuing variance increasing strategies instead, like leverage. However, altruistic investments are not used with the intention of saving for one’s own future, which allows the altruist to be more risk-neutral to chase higher expected returns.
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The returns for for-profit funds are relatively clear, but non-profit returns require a lot of work to understand. While there might be issues of applying the correct methodology, you can generally look at how much cash you get back for how much cash you put in. With non-profit investing, there is no clear measure of your return on investment. Instead, you have to use complex analysis to assess your return and some investments will never be able to show a conclusive return even if they do have one.
Peter Hurford wrote last year on the Effective Altruism Forum about the ‘hits-based giving’ approach the Open Philanthropy Project takes toward funding projects, inspired by YCombinator:
Peter also summarizes 80,000 Hours’ application of start-up principles to evaluating projects (For those unfamiliar, 80,000 Hours is the careers advising organization part of the Centre for Effective Altruism, and both 80,000 Hours and the CEA were incubated by YCombinator).
He makes a couple points relevant to your and Benquo’s observation about how non-profit investing should be more risk-neutral than appears to be the case between CEA and the Berkeley REACH.