Getting the most out of private charitable donations

My last couple of posts concerned governments’ difficulties in allocating aid. It is worth noting that individuals will probably not encounter the same problems in their aid donations, as they do not generally deal with governments in developing countries and their separate donations are relatively small and most unlikely to create budgetary or macroeconomic distortions. There is an analogy from investment: because governments have some difficulties (and advantages) in running companies does not mean that no private investor should ever enter the stock market. Some investment methods are useful to individuals when deciding how to donate to charity, too. I’ve written a little about them in the past, and here is a recap and extension.

Diversification is important. It is the “don’t put all your eggs in one basket” principle, so that giving all one’s money to a single organisation or in a single region exposes the donor to the risk that the money will be squandered, or the government will take it, or a smooth criminal is using it to enrich themselves. If a donor splits their donations across a range of organisations, countries, and types of aid, then the risk of all of them being hopeless is very low. The likely outcome is that some will be poor and some will be good, so there is a reasonable overall performance. The major aid organisations such as Care International are large enough to perform some internal diversification themselves, so that a general donation to one of them will have some built-in diversification. They are like tracker indices on stock markets, getting a good if pedestrian overall return usually.

An individual may wish to vary from diversification if they want a high-risk, high-return strategy. They might fund a really great organisation which outperforms the charity sector average by miles, but are exposed to the risks mentioned.

There is a principle in investment which says “don’t pour good money after bad”, that is, if a company is underperforming sell your investment rather than invest more in the hope that your money will come good. I have no empirical evidence on whether this strategy is best for charities too, but on theoretical grounds it seems very sensible; the underperformance of a charity might be the only hard evidence on its managerial quality available, so ignoring it seems daft.

Any charity should be willing to provide information on its activities and performance. If they are not, it is suspicious enough to cut funding immediately in my opinion. There are plenty of other charities doing excellent, open work, and their value outweighs any sentimental attachment to a particular organisation. With information, a donor can compare charities and give their money to organisations which reflect their values and offer the best value for money. The donor can look at overheads (how much is being spent on administration) and the impacts of the money spent. The donor might be interested in the numbers of lives saved per $100 spent, or the number of pumps built, or the number of children educated. These measures can be crude, as they do not make allowance for the quality of the education and such like. There have been studies into alternative measures of quality; donors who do not want to immerse themselves in the theory can use their intelligence and scepticism in studying reports and numbers instead. Charities, like other organisations handing money, should be subject to auditing in some form. For Western organisations, this usually involves independent accountants. A donor may want to engage in reputation auditing– if the organisation is large, has been running for many years, and has associations with major bodies such as the United Nations it is likely to have some external review of its operations already and the cost of incompetence or theft to its reputation is likely to be large enough to act as a discouragement. A donor may also want to audit personally and informally if the charity is small, visiting its operations in person (not always viable, cheap, or safe) or by first hand testimony from other visitors, or meeting the administrators and checking their honesty (honesty can be simulated, so concrete questions about operations will help to determine their knowledge, which is much harder to simulate and can act as a proxy for personal involvement and enthusiasm).