Should donors make commitments about future donations?
As donors, we have choices about which charities to give to. We tend to think these choices are important. We also have choices about whether to give today or save to give in the future.
If you come down on the side of giving now, one question is: should you also make commitments today about where you will give next year?
On the face of it, this seems like a pretty bad idea. By waiting until next year, you maintain option value. By then, it wouldn’t be too surprising if you had new information which changed your view about where could best make use of donations in that year. You always have the option of giving to the original charity, so making a commitment seems to be dominated by not doing so.
Despite this, I think it sometimes makes sense for donors to make multi-year commitments. I think this is particularly true when the value of money is diminishing noticeably over time, which is precisely the type of effect which can drive us to prefer giving now over giving later, and is often claimed to be true of EA organisations. The reason for this is that a commitment not only locks in the future money flow, but lets the charity know that it is locked in. That in turn allows the charity to plan around it.
Here are two things which I think are often believed about EA orgs:
The haste consideration means that resources (including money) are significantly more valuable this year than next year.
It is good practice for them to keep around 12 months reserves, in order to reduce attention being pulled by financial uncertainty, and allow them to make long-term plans.
If these are both true, then a certain commitment of money in 12 months would be significantly more valuable than just giving the money in 12 months time. Since it is certain, the charity could effectively treat it as part of its reserves, freeing up money from the reserves to spend today. But money spent today is significantly more valuable than money that would be spent in 12 months.
What’s going on here? By making a commitment, you’re effectively borrowing from your future self in order to fund more giving today. You borrow at the same rate the charity could save at for its reserves. If you already thought that giving now was better than saving to give later, this makes such commitments look extremely attractive, at least up to the point where the charities have their future reserves effectively covered by commitments.
It’s actually not as good as that. A certain commitment would reduce financial uncertainty for the charity, but increase financial uncertainty for you as an individual. Particularly if you are donating out of your income, if you were to lose your job, you could find that meeting the commitment required impoverishing yourself, or to be outright impossible.
Because of this, charities can’t treat commitments as certain, only likely. And this somewhat reduces their value for planning, as the point of the commitments substituting for reserves in the first place was to reduce financial uncertainty. Still, a good faith commitment can reduce total uncertainty, if the reasons that it would fail aren’t too correlated with the reasons other sources of income would dry up. For example, a donor getting sick or losing their job would probably be uncorrelated, but deciding to renege on the commitment because other giving opportunities look better could be correlated with other donors deciding not to give.
This uncertainty could potentially be reduced even further, if someone was willing to underwrite others’ commitments. Such an underwriting could provide even more of a help to planning (and therefore move spending forward in time), with little expected outlay.
If this is a good idea, how far should it be taken? Would five-year commitments be better than one-year ones? Ultimately there is a balance, as planning horizons are only so long. After one or two years the force of the argument based on keeping reserves is diminished. There could still be benefits in some cases if a longer commitment could allow confident planning of a longer-term project.
There is also a question about what proportion of future donations individual—and the community more broadly—should commit. The costs of committing the first half of future donations are smaller than the costs of committing the second half, while the benefits are typically at least as large for the first half. The costs are smaller for two reasons. First, because the increase in personal financial uncertainty matters less. It is less likely (and perhaps significantly less likely) that you will not be able to maintain at least half of current giving than that you will not be able to maintain current giving levels. Second, because it is extremely valuable that we keep some funds open and flexible to be able to respond to excellent giving opportunities that arise. This is crucial at the level of the community as a whole, but can also apply at the level of individual donors, to reduce friction if those individuals are the ones who discover the giving opportunities.
Given all of this, here is my current view. Donors should be particularly excited about making commitments if they give to charities whose opportunities for creating value are shrinking significantly over time. For small donors, the overhead costs of having conversations about how serious commitments are may be higher than the value the commitment generates. They should therefore not attempt to make hard commitments. They could still create extra value by unilaterally making soft commitments to charities about some fraction of their donations for next year, at the time they make their donations. Larger donors could create substantial value by making commitments about a fraction of their future donations. They could assess how much this would help the organisations they are donating to by having a conversation with them, which would also help the recipients of the commitments to gauge how much they can trust the commitments. I think that the basic argument for this conclusion is moderately solid, but perhaps I have missed or underweighted some important consideration. I’d be interested in thoughts.
Disclaimer: I am employed by the Future of Humanity Institute, and have previously been employed by the Centre for Effective Altruism. The views expressed are my own, not my employer’s.
Acknowledgements: this post was inspired by conversations at and after EA Global. Thanks to Kerry Vaughan for suggesting I turn it into a post. Thanks also to Michael Page and Stefan Schubert for helpful comments on a draft. Errors of analysis remain my own.
This seems to be about medium term commitments vs no commitments. There is also a major reason to consider long term commitments in many cases: it affects the talent pipeline. Grad students don’t focus on areas that might not exist by the time they want to start direct work in an area. This likely only affects very large donors though.
I agree with this to a point. I do think that longer-term commitments to areas from large funders can help to affect the talent pipeline (but long-term support is unlikely to be just down to a single funder).
There are some other reasons for large funders to commit to areas, that Holden Karnofsky discussed in this post from 2014.
I think that Karnofsky’s post, as well as the above discussions, miss another important set of considerations for effectiveness (which only really apply to people giving over $100,000, but still):
1) Lowering fundraising and transaction costs for the charity: When a large donor agrees to stay with an organization for a long time, that organization can focus more on their programs and less on fundraising—when donors are constantly shifting from organization to organization, organizations are constantly being forced to spend valuable resources replacing them. In addition to fundraising costs, it’s also important to remember various transaction costs, such as reporting requirements (which you can work to streamline over a long-term engagement with a trusted organization).
2) Uncertainty for the capacity building: Keep in mind that helping build an organization’s capacity can have long-term impacts beyond just ‘# of bednets distributed’. When it comes to long-term donor relationships, it’s not just about revenue planning (which was mentioned above), but also about strategic planning. Lets say that your current largest donor is really interested in, say, monitoring and evaluation. If you know that that donor will stay around for a while, you can invest in your M&E capacity knowing that it will continue to be funded, but if that donor is going to switch to another organization in a year, how can you be sure that the next donor will fund you in a similar way? You might need to prepare to cut your M&E the instant you find a new donor.
3) Giving to learn isn’t just about building a network and learning about a cause, it’s also important to have deep relationships with an implementer: Shallow relationships only go so far, building a strong, ongoing relationship with an organization you trust can help you prioritize growth areas within that organization, and set both you and the organization up for successful experimentation and problem solving.
Caroline Fiennes of Giving Evidence (https://giving-evidence.com/) has a few other good reasons for focusing on building a long-term relationship with a small number of charities, but unfortunately I cannot find a consolidated blog post or article on this specific topic. Still, if you dig into her work, she does have a lot of interesting work on how the way in which people give (e.g. long vs. short term) has implications for the long-term effectiveness of charities. I would definitely recommend looking in to her work.
Thanks, these are great points. I think that 1) applies even for smaller donors.
I am not donating any money this year, but I did promise GFI that I would donate $25,000 to it early next year. I discussed this with GFI and we agreed that this was about as good as donating the money immediately.
Due to uncertain finances from buying a condo, I’ve also started making some of my 2016 donations to in the form of publicly credible statements and IOUs (such as my grant to SHIC), with the intention of paying them out either by the end of the year or in early 2017.
How strong should these commitments be? If I commit now to give $50k (for example) to a charity next year, and then strong evidence comes out that they are less effective in the meantime, should I still donate? Presumably I have to donate despite some such evidence, or there is no commitment, but it seems plausible these commitments shouldn’t hold in the event that the charity turns out to be fraudulent, etc.
I agree that they shouldn’t hold if the charity turns out to be fraudulent (violating trust one way gives justification in breaking promises the other way). I guess the line should probably be such that a charity acting in good faith can more-or-less count on the commitments. Otherwise it seems like the charity gets back the problem of second-guessing its donors, and may not make the forward-going plans the commitments were supposed to facilitate.
I can see some appeal to drawing the line such that evidence of radically less effectiveness was enough to break the commitment, but not normal levels of update. In theory this could give similarly high levels of certainty. However, the fact that different people might reasonably interpret evidence different ways may worry the charity, and again lose the benefit of the commitment. Compared to the presumably small chance of actually having to pay the cost of funding despite big negative updates, this seems like it could be enough to leave fraud as the line in the sand. I’d love to know whether this seems correct to others.
All of this is made easier if the people running the charity are likely to also be receptive to high-quality evidence, in which case they could be willing to either restructure to address problems, or dissolve commitments.
In any case, thanks for asking the question. This is something it’s helpful to be particularly clear about ahead of time, to avoid the extra uncertainty costs that come with ambiguity.
As you explain, the key tradeoff is organizational stability vs. donor flexibility to chase high-impact opportunities. There are a couple different ways to strike the right balance. For example, organizations can try to secure long-term commitments sufficient to cover a set percentage of their projected budget but no more, e.g., 100% one year out; 50% two years out; 25% three years out [disclaimer: these numbers are not considered].
Another possibility is for donors to commit to donating a certain amount in the future but not to where. For example, imagine EA organizations x, y, and z are funded in significant part by donors a, b, and c. The uncertainty for each organization comes from both (i) how much a, b, and c will donate in the future (e.g., for how long do they plan to earn to give?), and (ii) to which organization (x, y, or z) will they donate. The option value for the donors comes primarily* from (ii): the flexibility to donate more to x, y, or z depending on how good they look relative to the others. And I suspect much (if not most) of the uncertainty for x, y, and z comes from (i): not knowing how much “EA money” there will be in the future. If that’s the case, we can get most of the good with little of the bad via general commitments to donate, without naming the beneficiary. One way to accomplish this would be an EA fund.
I say “primarily” because there is option value in being able to switch from earning to give to direct work, for example.
This is an empirical question, but at the moment my intuition goes the other way: that the fraction of the benefits of committing coming from commitments to specific organisations is larger than the corresponding fraction of costs. I have two main reasons for thinking this:
The first reason for this is that commitments from existing donors won’t shed that much light on the total amount of “EA money” that will be available: in the first place because personal financial uncertainty means they shouldn’t make firm commitments about all of their giving; in the second place because the amount of EA money that is available will depend in significant part on the rate of influx of new donors, and a lot of the uncertainty will relate to that.
The second reason is that I think organisational decision-making is particularly helped by pushing uncertainty towards zero. The effective difference between a 59% and a 79% chance of getting enough funding may be rather smaller than the difference between a 79% and 99% chance. Organisations may be reluctant to take on new staff if that gives a realistic chance of having to let existing staff go. So the benefits of having organisational certainty rather than just sector-certainty are large. (If we believe this is false, we should perhaps think that orgs should stop holding significant reserves.) I’m not expert in this, would be interested to hear thoughts from people more directly involved in financial planning for EA orgs.
Based on our experience at Stiftung für Effektiven Altruismus (EAS), I fully agree with this post – thanks a lot for writing it!
I don’t have a particular citation for this right now, but in conversations I’ve had with others about the future of earning to give, it’s come up individual marginal donors keep up earning to give to fund the unusually good opportunities that arise. That is, major foundations like Open Phil and other committed donors could cover most funding needs of existing organizations. So, those of us left earning to give might be best to keep our money as flexible as possible to fund new projects to small to be on the radar of bigger and major funders in the first place.
This consideration seems to disfavour making future commitments, because it would prevent keeping funds as flexible as possible. That stated, this can’t be a complete reason not to make future commitments. We shouldn’t think as though new excellent projects will magically pop up unpredictably, and so the only way we can be prepared for the opportunity to fund them is to have stacks of uncommitted cash. If we have no expectation of what the next new and promising projects will be or look like, this says more about how we learn more about the areas we’re prioritizing than about how we should allocate funds.
Still, this isn’t a completely solved problem. How should the above consideration impact of how much of our future donations we fixedly commit?
If you think you have a comparative advantage as a donor that you have the time and inclination to look into small giving opportunities that might otherwise be missed, it makes sense to play to that. (I don’t think that will apply to everyone who is earning to give.)
Even with small projects, you might consider whether future commitments are a helpful tool in offering them funding. This would increase your ability to fund opportunities with smaller amounts of cash on hand, which in turn might make you more comfortable about making commitments now.