John Arnold isn't a household name, but those involved in the US energy markets will recognize him as an incredibly successful energy fund manager. Arnold cut his teeth as a trader at Enron, and then started Centaurus Advisors, an energy-focused hedge fund in Houston, reportedly building up a net worth of $4b. It thus came as a surprise to many observers when he announced his retirement from Centaurus in 2012 at the age of 38.
In typical Arnold fashion, he appears to be flying under the radar in his second career - though, again, with the occasional big bang. In May 2013, Arnold and his wife were featured in the WSJ for their philanthropy - not simply for writing big checks, mind you, but for taking a keen interest in the efficiency of their contributions, and for being willing to fund projects of uncertain value with potentially large payoffs. As the WSJ reports, "The Arnolds want to see if they can use their money to solve some of the country's biggest problems through data analysis and science, with an unsentimental focus on results and an aversion to feel-good projects - the success of which can't be quantified."
This type of philanthropy isn't new. Bill Gates seems to be the prototype for a guy who's made a lot of money in one field and hurls himself into the weeds of philanthropy. But it does seem to be catching on. No doubt there are various reasons for this, but one can easily point to the increased sophistication of programme evaluation, the larger influence of business and finance types as donors, as well as a general wave of enthusiasm for all things "evidence-based" (evidence-based medicine, evidence-based journalism, evidence-based investing... all good, but what were people doing before?). In their book Poor Economics, Duflo & Banerjee highlight the growing use of randomized controlled trials in development economics. Their line of thinking proposes that "it is possible to make very significant progress against the biggest problem in the world through the accumulation of a set of small steps, each well thought out, carefully tested, and judiciously implemented."
I find this way of thinking very appealing, particularly for its potential to compare the payoffs from competing development or philanthropic strategies. It's no surprise that we often let affinity and empathy obscure our thinking in these issues. By this I mean that we find it easier to contribute to our own communities and countries, even though there are often considerably greater needs once we cast our gaze slightly further afield. Rigorously collecting and evaluating data seems to offer a path to quantify the costs of myopic charitable giving.
As a result, I've been wrestling over the past few months with how to frame philanthropy as a form of investing. The aim should be to maximize the net present value of charitable giving. But there are two weaknesses with this approach. First, this sort of philanthropy is probably much easier for the very rich, who have the means to guide recipients into providing reams of data. My sense is that it is quite hard, as a small donor, to get much insight into the full working of organizations. And, second, the truth is that even if the data were available, I've struggled mightily with how to think about the incremental benefit of donor dollars, and the appropriate discount rate.
In his book The Life You Can Save, Peter Singer makes the point that "there are many organizations doing good work that offer opportunities worth supporting, and not knowing which is the very best shouldn't be an excuse for not giving to any of them." In fact, he goes so far as to argue that "some uncertainty about the impact of aid does not eliminate our obligation to give."
I disagree with the last assertion. If we have an obligation to give, we have an equal obligation to ensure that we are giving well. Angus Deaton disagrees at an even more fundamental level. In his book The Great Escape, he surprisingly denounces most forms of charitable giving, particularly foreign aid. "What surely ought to happen is what happened in the now-rich world, where countries developed in their own way, in their own time, under their own political and economic structures... We need to let poor people help themselves and get out of the way - or more positively, stop doing things that are obstructing them."
Yet he doesn't think all forms of giving are unhelpful. Deaton goes on to make two distinctive arguments for giving to universities. I've often thought of giving to universities (especially one's own alma mater) as a form of vanity giving, particularly with the thriving endowments many universities have today. But Deaton makes two good counter-arguments:
1) "As the economist Jagdish Bhagwati has argued, it is hard to think of substantial increases in aid being spent effectively in Africa. But it is not so hard to think of more aid being spent productively elsewhere for Africa." In particular, Deaton suggest funding basic research on health and agriculture.
2) "The effects of migration of poverty reduction dwarf those of free trade... A helpful type of temporary migration is to provide undergraduate and graduate scholarships to the West, especially for Africans. With luck, these students will develop in a way that is independent of aid agencies or of their domestic regimes." (In similar fashion, see Michael Clemens on why migration should be a major part of the UN's Sustainable Development Goals).
More importantly, perhaps, the notion of doing the most good with any specific type of giving is probably unnecessary. One of the basic tenets of investing is diversification. Similarly, it probably makes sense to think of charitable giving as a portfolio, mixing bets of different individual risk, reward, and with little overlap (i.e. low covariance).
Finally, just as I wouldn't suggest a complete novice spend his time on security analysis or asset allocation, perhaps novice donors don't need to spend copious amounts of time dissecting philanthropic organizations. Intermediaries such as GiveWell have made it easier to learn about NGOs who are doing important work.
These may not seem like the most exciting, or even the most personally satisfying forms of philanthropy. But just as disciplined investing isn't always exciting, I'm starting to believe that philanthropy can quite reasonably be seen as a way to combine a rigorous view of individual organizations with the benefits of diversification to obtain the best long-run outcome with one's giving.
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