Ozy vs. Scott on Charity Baskets

I have invited Ozy to post to Slate Star Codex. I ended up disagreeing with their first post, so I’m going to include it along with my rebuttal.

Ozy:

A man goes up to a stockbroker and says, “You guys are so stupid. You invest in more than one stock. But there’s only one stock that is going to pay off the most. Why don’t you just put all your money in the stock that is going to earn the most money, instead of putting it in a bunch of stocks?”

With my usual quick and timely response, I would like to point out the fallacy within this article on effective altruism. The author offers up several things that would, in an effective altruist world, not exist:

If we all followed such a ridiculous approach, what would happen to:

1. Domestic efforts to serve those in need?
2. Advanced research funding for many diseases?
3. Research on and efforts in creative and innovative new approaches to helping others that no one has ever tried before?
4. More local and smaller charitable endeavors?
5. Funding for the arts, and important cultural endeavors such as the preservation of historically important structures and archives?

6. Volunteerism for the general public, since most “worthy” efforts are overseas and require a professional degree to have what Friedman calls “deep expertise in niche areas”?
7. Careers in the nonprofit sector?”

The answer to several of those is pretty obvious: people should work in the nonprofit sector if that’s their comparative advantage, who gives a @#$! about volunteerism or local charitable endeavors, arts funding comes out of people’s entertainment budgets they way it should, and resources are scarce and each donation to someone relatively well-off in the developed world trades off against resources from someone less well off. So far, so well-trammeled.

However, I think his points two and three are actually really interesting points. A lot of people seem to think of effective altruism as like the man who wants to invest in the best possible stock. However, in reality, just as a person who wants to maximize their returns invests in more than one stock, a society where everyone is an effective altruist would probably have a variety of different charities (although perhaps a narrower segment of charities), just as they do now.

To be clear, there are certain charities that are not effective at all and would probably not exist in a hypothetical effective altruist society. Make a Wish Foundation would probably not survive the conversion to a hypothetical effective altruist society (except, presumably, out of one’s entertainment budget). Nevertheless, the nonexistence of obviously ineffective charities doesn’t mean that we as a society would decide to have fewer charities, any more than not buying lottery tickets means that you are only allowed to invest in one stock.

(Note that I am using stocks as an analogy. Stocks and charity donations are unlike each other in a lot of ways. It isn’t a perfect metaphor. Also, I literally know nothing about stock investing.)

One of the reasons that people invest in more than one stock is uncertainty. Probably some stocks will go up and some stocks will go down. However, I, as an investor, don’t know which stocks will pay off more than other stocks. Therefore, I want to hedge my bets. Knowing that the market will go up in general, I choose to invest in a variety of different stocks, so that no matter what happens I keep some of my money.

A similar uncertainty applies to charities. For instance, it’s possible that Give Directly is run by crooks who steal all the donations. (As far as I know, Give Directly is an excellent organization and never steals anyone’s money.) If everyone has given to Give Directly, we’re screwed. If we have several different charities giving cash to people in the developing world, then it matters less that one of them is run by crooks. Similarly, we may be uncertain about whether malaria relief or schistosomiasis relief is the best bang for one’s charity buck. Given that it is impossible to eliminate all uncertainty, it’s best to direct some money towards both, so that in case malaria relief turns out to be a bust we haven’t wasted all our charitable budget.

In stocks, return is a function of risk. If there’s a chance of a large payoff, there’s an even larger chance of going bust and losing everything. If there’s not very much risk, you get payoffs that are barely larger than inflation. Therefore, you want a balanced investment strategy: have some high-risk investments that might make you rich, and some low-risk investments that have a less awesome payoff.

This also applies to charity donation, which is where we get to Berger and Penna’s concerns. Something like malaria relief is low-risk and relatively low-return. If you distribute malaria nets, it is pretty certain that people are going to have lower rates of malaria. However, there’s not much chance of getting a payoff higher than “people have lower rates of malaria, maybe no malaria at all,” which will save probably millions of lives. Compare this to, say, agronomy or disease research. With agronomy, there is a high chance that you will pour in millions of dollars and get nothing. Most agronomic research gets us, say, wheat that’s a little better at resisting weeds, or better understanding of the ideal growing conditions of the chickpea. However, there’s the slim chance that you’ll have another Green Revolution and save literally billions of lives. As effective altruists, we want to invest in both high-risk high-return and low-risk low-return charities.

Another important example of a high-risk low-return charity is a new charity, which I think is important enough that I’m going to talk about it separately. What happens if someone has a brilliant new idea about how to help people in the developing world? There’s potentially a high payoff if they can beat the current most effective charity; but new ideas for effective charities are probably not going to pay off, if for no other reason than ‘most new ideas are terrible.’ It is really important that we invest in new ideas.

What happens to a low-risk high-return charitable investment? Well, it is clearly the most effective place to donate and becomes our new baseline, and the same trilemma survives. Other charities are either comparable, and thus either higher return but higher risk or lower return but lower risk, or incontrovertibly better and the new baseline.

Please note that I’m not saying the individual should donate multiple places. Probably any individual only has time to investigate one family of charities and – for that matter – gets the most warm fuzzies from only one charity. I think that most people should probably only donate to one charity, because they can be certain they’re donating to the most effective charity they can. But what that charity is is different for different people. And, no, a hypothetical effective altruist society won’t totally lack scientific research.

Scott:

I think I disagree with this. That is, I’m sure I disagree with what I think it says, and I think it says what I think it says. I think it confuses two important issues involving marginal utility – call them disaster aversion and low-hanging fruit – and that once we separate them out we can see that diversifying isn’t necessary in quite the way Ozy thinks.

Disaster aversion is why we try to diversify our investments in the stock market. Although there’s a bit of money maximization going on – more money would always be nice – there’s also an incentive to pass the bar of “able to retire comfortably” and a big incentive to avoid going totally broke. This incentive works differently in charity.

Suppose you offer me a 66% chance of dectupling my current salary, and a 33% chance of reducing my current salary to zero (further suppose I have no savings and there is no safety net). Although from a money-maximizing point of view this is a good deal, in reality I’m unlikely to take it. It would be cool to be ten times richer, but the 33% chance of going totally broke and starving to death isn’t worth it.

Now suppose there is a fatal tropical disease that infects 100,000 people each year. Right now the medical system is able to save 10,000 of those 100,000; 90,000 get no care and die. You offer me a 66% chance of dectupling the effectiveness of the medical system, with a 33% chance of reducing the effectiveness of the system to zero. In this case, it seems clear that the best chance is to take the offer – the expected value is saving 56,000 lives, 46,000 more than at present.

The stock market example and the tropical disease example are different because while your first dollar matters much more to you then your 100,000th dollar, the first life saved doesn’t matter any more than the 100,000th. We can come up with strained exceptions – for example, if the disease kills so many people that civilization collapses, it might be important to save enough people to carry on society – but this is not often a concern in real-life charitable giving.

By low-hanging fruit, I mean that some charities are important up to a certain point, after which they become superseded by other charities. For example, suppose there is a charity researching a cure for Disease A, and another one researching a cure for Disease B. It may be that one of the two diseases is very simple, and even a few thousand dollars worth of research would be enough to discover an excellent cure. If we invest all our money in Disease A simply because it seems to be the better candidate, the one billionth dollar invested in Disease A will be less valuable than the first dollar invested in Disease B, since that first dollar might go to hire a mediocre biologist who immediately spots that the disease is so simple even a mediocre biologist could cure it.

This is also true with more active charities. For example, the first bed net goes to the person who needs bed nets more than anyone else in the entire world. The hundred millionth bed net goes to somebody who maaaaaybe can find some use for a bed net somewhere. It’s very plausible that buying the first bed net is the most effective thing you can do with your dollar, but buying the hundred millionth bed net is less effective than lots of other things.

In this case, at any one time there is only one best charity to donate to, but this charity changes very quickly. In a completely charity-naive world, Disease A might be the best charity, but after Disease A has received one million dollars it might switch to Disease B until it gets one million dollars, and then back to Disease A for a while, and then over to bed nets, and so on.

We can turn this into a complicated game theory problem where everyone donates simultaneously without knowledge of the other people’s donations, and in this case I think the solution might be seek universalizability and donate to charities in exactly the proportion you hope everyone else donates – which would indeed be a certain amount to Disease A, a certain amount to Disease B, and a certain amount to bed nets, in the hope of picking all the low-hanging fruit before you subsidize the less efficient high-hanging-fruit-picking.

But in reality it’s not a complicated game theory problem. You can go on the Internet and find more or less what the budget of every charity is. That means that for you, at this point in time, there is only one most efficient charity. Unless you are Bill Gates, it is unlikely that the money you donate will be so much that it pushes your charity out of the low-hanging fruit category and makes another one more effective, so at the time you are donating there is one best charity and you should give your entire donation to it.

Granted, people are not able to directly perceive utility and will probably err on exactly what this charity is. But I think the pattern of errors will be closer to the ideal if everyone is trying to donate to the charity they consider highest marginal value at this particular time rather than if everyone is trying to diversify.

The reasons for diversifying in the stock market are based on individual investors’ desire not to go broke and don’t really apply here.