Eric Gastfriend (MBA ’15) is the co-Founder of Harvard University Effective Altruism Student Group. He explains why now is the time to pay attention to effective giving.
Suppose I told you about an investment that would easily generate a 60x return in a few years with very little risk. And then I tell you that some of the world’s top economists have looked at the opportunity and agreed with me.
“Impossible,” you might say. “Surely if there were such an obvious source of alpha, investors would pile in like teenage girls at a Katy Perry concert and the opportunity would be gone faster than you can say FOMO.”
In the stock market, you would be right. Opportunities for 60x returns do exist but they cannot be obvious – the system should bring the prices of stocks into equilibrium so that their expected risk-adjusted ROI’s are roughly even. But the investment I’m talking about isn’t in the stock market – it’s nutrition programs in the developing world aimed at preventing stunting, i.e. feeding kids vitamins (think Flintstones or Gummy Bears, your choice).
According to the Copenhagen Consensus, a think tank that does cost-benefit analysis and project prioritization, one dollar invested in these programs generates roughly $60 in NPV. The problem is that the returns come back to society in the form of children who become more productive citizens later in life, rather than coming back to the investor or philanthropist who funded the program.
This causes two problems. One concerns incentives. In philanthropy, since there’s no incentive to maximize returns for ourselves, we are motivated to engage altruistically with the causes we find most emotionally compelling, which may not correlate well with maximizing social ROI.
The second problem is information. Philanthropists don’t get a portfolio statement at the end of the year outlining the impact they achieved. They get letters from the charities they support outlining what the charity did during the year, but usually not describing how those activities translate into life outcomes, and hardly ever measuring the difference between the actual outcome and what would have happened without the philanthropic investment (the counterfactual/causal impact).
This is why the non-profit sector lacks the equilibrium and rigor of public markets. Not enough people are hunting for altruistic bargains the way we hunt for high ROI investments. In fact, according to a 2010 Hope Consulting survey, two thirds of donors do no research at all, and only three percent research the relative performance of different charities. No wonder the non-profit sector has a reputation for lacking efficiency – we, their investors, haven’t been imposing it upon them the same way we do for our for-profit investments.
Luckily, there is a huge bright side to this problem. The fact that others are investing suboptimally means that there are massive opportunities to do good in the world that are hiding in plain sight. When Warren Buffett started his investing career in 1950, the stock market was much less sophisticated than it is now, and I argue that the current non-profit sector is even less sophisticated than the stock market of 1950. This means that you could easily be the Warren Buffett of social investing!
Where to start? First, you’ll need to consult the research of the best analysts. GiveWell, a charity evaluator, has researched hundreds of charities and evaluates them on evidence of impact, cost-effectiveness, room for more funding, and transparency. Their top charity, Against Malaria Foundation (founded by HBS alum Rob Mather), delivers insecticide-treated bednets in sub-Saharan Africa to prevent Malaria, at an estimated cost of roughly $3,000 per life saved. Their other top-rated charities offer similarly amazing bargains for improving the human condition.
Next, we need our CAPM for social investing—a framework for thinking about do-goodery in a rigorous and analytical way. Effective Altruism is a growing body of thought on how we can accomplish the most good for the world given our limited time, energy, resources, and money. It applies the philosophy of ethics and epistemology to real-world questions such as which careers do the most good or where we should donate.
Just as behavioral investing techniques look to the work of behavioral economists such as Daniel Kahneman to guard against our built-in emotional biases and to act more rationally, so too does Effective Altruism seek to incorporate those lessons, especially since altruism is a much more emotional activity to begin with. There are a growing number of organizations, blogs and forums approaching the world’s problems from this perspective; I recommend getting on the email lists of organizations such as GiveWell, Giving What We Can, and The Life You Can Save as an easy way to learn more.
Finally, we need a community. To that end, I’ve co-founded the Harvard University Effective Altruism Student Group (HUEA) to engage grad students from across the University in active dialogue about these ideas. This semester, we’re planning on hosting talks from HLS professor Cass Sunstein and world-renowned ethicist Derek Parfit. We also have the Social Enterprise Club Effective Philanthropy interest group here at HBS. Our undergrad friends at Harvard College Effective Altruism (HCEA) also organize great events.
Please reach out to me ([email protected]) if you’d like to learn more, get added to our mailing list, or ask any questions. Even if you think this is the worst idea you’ve ever heard, I want to hear your thoughts – these kinds of debates don’t happen enough on campus. And regardless of what you think of the Effective Altruism approach, I hope you’ll agree that there are massive opportunities for us to do good for the world – and you could be the one who finds them.