Bryan Caplan  

From the Cutting Room Floor: The Rationality of Donors

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From the Cutting Room Floor: T... Devil Says "Sin Less"...

And here's a scene about the rationality of charitable donors, inspired in part by Landsburg's "giving your all" theorem:

d.  Charitable Giving

Bennett and DiLorenzo (1994) argue that due to donors' rational ignorance, the market for charitable giving works poorly.  But given that a person finds it worthwhile to donate in the first place, it is unclear why search effort would be especially low: in either case, gathering more information lets you get more for your money.  Perhaps some people only donate to charity in order to feel better about themselves; but they will only feel better because they believe that their donation makes the world a better place.  Suppose, in other words, that self-image is one of the arguments in their utility function, and they maximize utility given their psychological "technology" for transforming the (subjectively) expected social value of their charity into self-image.  With rational expectations, even donors who care solely about their self-image would acquire information and otherwise act as if they were trying to maximize the (objectively) expected social payoff of each of their charitable dollars. 

Yet people often seem to allocate their charity in a suboptimal way given their moral preferences.  Landsburg (1997) shows that under weak assumptions a rational altruist will only donate to one charity.  Intuitively, unless you are both extremely wealthy and extremely generous, your individual donations won't change the most important cause in the world into the second most important.  In practice it is much more common for people to give small amounts to a variety of causes.  Similarly, if charities compete for contributions from rational altruists, fraud and deception by charities should be no more prevalent than in the for-profit sector; like consumers in other markets, rational altruists will somehow verify that they are getting what they pay for.  Yet in practice the level of malfeasance in the charitable sector seems unusually high. (Bennett and DiLorenzo 1994)

The model of rational irrationality offers a partial explanation.  If self-image arises from how much good you believe your donations do, then irrationally over-estimating your impact can be utility-enhancing.  Monitoring charities and supporting the most efficient one increases the impact of your charitable dollars on the world, but reduces the impact of your charitable dollars on your self-image.  As long as the donor can sustain the belief that the charitable market is working efficiently, he gets the greatest possible psychic payoff from his donation. 

  Adopting this principle would enable any donor, whatever his viewpoint, to increase the beneficent impact of his donations.  But avoiding this insight has offsetting benefits: You need not acknowledge that your past donations were suboptimally allocated; neither do you indirectly oblige yourself to ascertain the identity of the most deserving cause in the world.
If I remember correctly, one of the reasons I cut this section was because Alex Tabarrok told me it was unconvincing.  I haven't looked at it for about eight years, but I still think it's on-target.  Your thoughts?

P.S. This will be my last post for a while.  If I have convenient Internet access and enough spare time, I may blog from Singapore and/or Malaysia.  Otherwise, the next time you'll be hearing from me is around Thanksgiving.


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COMMENTS (11 to date)
Les writes:

If one believes in consumer sovereignty, or in property rights, then donors cannot - and should not - be compelled, instructed or cajoled on how to donate.

Laissez faire makes sense to me.

Kurbla writes:

Diversifying is better if all people behave that way. It is Kant's categorical imperative. In this case, not unusually, our emotions encourage behavior consistent to the categorical imperative.

dWj writes:

> but they will only feel better because they believe that their donation makes the world a better place

Perhaps one maximizes the belief that one's donation makes the world a better place by remaining ignorant.

On a less cynical note, if I'm trying to maximize the probability that I'm doing net good with my donations, rather than the expected value of the good I do, then diversifying over an array of charities to which the expected value exceeds my cost but which may be high-risk (i.e. likely to do much better or much worse with my money than I currently guess) would do a better job than acting in a rational way. I can imagine loss-aversion taking place here, if I frame the net result of all of my charitable contributions (and nobody else's) as a single episode.

Dan Weber writes:

Diversifying is bad because it encourages charities to continue spending massive resources on acquiring capital, which they then turn around and use to acquire capital.

It's better to donate a lot to a few charities (along with some hours of your time) than a little to a lot of charities. It cuts down on the transaction costs, and volunteering in person lets you get a good handle on how well the charity uses any monies you would donate.

I have a few causes I support, because I've seen them use my money well.

Captain Awesom writes:

I don't see this at all. It seems perfectly sound to posit that the net benefit of an extra dollar to any of several charities is the same, and as such I can be rationally indifferent toward any given allocation of a fixed amount among the several, be it all going toward one of the charities or diversified. The crucial assumption you're making is that the expected benefit has to be different among different charities, if only by a little, but I see no reason to think this must be the case. Indeed, if you asked most people which is better, an extra dollar for AIDS research or an extra dollar for cancer research, most people off the top of there heads would probably say both marginal benefits are the same.

Bob Murphy writes:

Well, I didn't find it convincing either Bryan, but it's because I'm still skeptical about the whole notion of "rational irrationality." :) If you remember when you presented that paper at NYU (I was a punk grad student at the time, as opposed to a punk blog commenter as I am now) Mario Rizzo asked you, "Isn't there some kind of conundrum here, where you're saying people act on beliefs that deep down they know to be false?"

So the same thing here. When you write:

If self-image arises from how much good you believe your donations do, then irrationally over-estimating your impact can be utility-enhancing.

...that just sounds too easy to me. I could just as easily say, "Hey, why the heck do more people visit Econ Log than my blog? Is it because they think Caplan et al. are more interesting? No, they all share my preferences that I'm the best blogger in the world, but they fool themselves into thinking Bryan is more respectable, and then they get more utility from reading what they know to be his inferior work."

So when people aren't donating the way you think they should, your solution isn't to say, "Hmm, they're not analyzing the situation the way Landsburg is with his neoclassical model of maximization in the face of uncertainty."

Nope, instead you say, "Ah, they're being irrational. Oh but wait, in my world irrational behavior makes the universe explode. OK, they are being rationally irrational."

I realize I am being hasty and firing off quick comments with little defense, but I have to be brief. Anyway, the above was what always bothered me about this "rational irrationality" approach.

RubberCity Rabble writes:

Landsburg can crank out the calculus to dictate how one should cast one's bread, but Ecclesiastes 11 says "Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth.... As thou knowest not what is the way of the spirit... even so thou knowest not the works of God who maketh all. In the morning sow thy seed, and in the evening withhold not thine hand: for thou knowest not whether shall prosper, either this or that, or whether they both shall be alike good."

For a person who takes that to heart, is it more rational to follow the math or the Word?

Andy Wood writes:

For a person who takes that to heart, is it more rational to follow the math or the Word?

Well, the Old Testament was written, perhaps, a couple of millenia before the discovery of calculus, so it's hardly surprising that it's riddled with mistakes.

Michelle Huang writes:

"If self-image arises from how much good you believe your donations do, then irrationally over-estimating your impact can be utility-enhancing."

I agree with that.

I remember Canadian Blood Services has four types of donations: whole blood, plasma, platelets, and stem cells.

Whole blood donation takes no longer than 20 minutes (excluding registration, waiting, etc); plasma donation about an hour; platelets an hour and half; and stem cells donation requires a minor surgery.

Plasma and platelets are blood products that can be separated from whole blood, or collected directly from donors through a special process. A direct plasma donation provides 2-3 times the amount of plasma that can be separated from one whole blood donation; and a platelets collection provides 6-8 times the amount of platelets that can be collected from a whole blood donation. Now I think of it, this is probably a more efficient way of donating blood.

And stem cells donation works through a registration system called OneMatch. Your marrow will help one specific patient whose blood has special genetic markers that yours match. He or she is usually a leukemia patient and your matched marrow is literally life-saving. Now I think of it, this might be the best way to maximize the impact of my donation.

However, the pamphlet from the clinic, in order to encourage blood donors in general, says this:

"...one blood donation...can save up to three lives"

I thought that's a much exaggerated claim. But nevertheless, I remained a whole blood donor.

jsalvati writes:

However, if you ARE rationalist (and not transhumanist) and want to make the most of your donation, you best bet is probably GiveWell, which is a charity that researches other charities in order to find the most effective one (lives saved/$). Their research is already funded, so any money you give to them goes to that charity. Last year's recommendations

Tom West writes:

On the other hand, lots of people give based on who is at the door soliciting donations. You may choose to give small amounts to those who seem legitimate in order to avoid social awkwardness and assuage guilt.

This seems quite rational to me.

If that is (based on my neighborhood) 1-2 visits a week, you may end up donating a reasonable amount (especially if you add that to the 1-4 phone calls a week) with next to no analysis at all.

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