I just wanted to raise a short critique that came to me while reading this section:
Investment funds regularly take a management fee (hedge funds, for example, typically take 1–4% of invested funds each year). Whereas the charitable funds we recommend don’t take any fees for their work.
While I certainly understand the point, it seems a little bit more justification for why this is a good arrangement is desirable when viewed through an economics lens. The reason that there are management fees is so that there is an economic incentive for the people running the fund to stay “alive”. In economic terms, ideally, the management fee would be conditional on the profits made using an investment so as to align interests between management team and investors. However, even in cases where there is a simpler arrangement, having economic incentives in place helps to align interests as long as the management teams depends on them.
So, I guess my point is, what we are doing here in the donation space seems to be a very trust based arrangement, where we would need to justify the mechanisms that ensure that interests between management and investors remain aligned if the management team does not depend on the fund surviving. I am slightly worried about this after the whole SBF and FTX debacle. There is/was a lot of good will towards people who seem to have a lot of money and claiming they want to do good with it. How do we make sure that not all of our eggs are in one basket and potential downsides in the case of betrayal or corruption are limited?
I think fees make sense for investment funds because it increases their incentive to make a profit for their customers. But I don’t think a straightforward fee for charitable funds would increase their incentive to have an impact (though perhaps it would increase their incentive to convince donors they are having an impact—but this is still a ‘trust based arrangement’).
That said, I take your point about the problems with trust based arrangements! I feel in the ideal world, charitable funds are funded proportional to the quality of their grants. To some extent, this is what already happens (often these funds are themselves funded by a different funder after conducting some kind of evaluation), but it’s often not public. I’m hoping that Giving What We Can’s work evaluating the evaluators will help provide additional accountability and help donors make a more informed choice about which funds to trust.
I just wanted to note that I didn’t want to imply or recommend that the fund managers should be payed but rather that there is a reason fund managers are payed. I think this reason was somewhat neglected in the post. I think more of an argument / investigation would be helpful to understand why / find out if the current arrangement is well-thought out.
I think my main concern is that funds tend to centralize funding pretty strongly and this can have positive but also negative consequences in certain situations. Imagine a corrupt fund manager having access to / leverage over hundreds of millions of dollars.
Paul Christiano’s suggestion regarding donor lotteries may be an interesting approach in this regard because it makes the whole thing less interesting for career criminals.
Having said all that I am not overly concerned that this is a pressing issue for the community but still something that should be in the (back of the) mind of people who design such management systems.
I just wanted to raise a short critique that came to me while reading this section:
While I certainly understand the point, it seems a little bit more justification for why this is a good arrangement is desirable when viewed through an economics lens. The reason that there are management fees is so that there is an economic incentive for the people running the fund to stay “alive”. In economic terms, ideally, the management fee would be conditional on the profits made using an investment so as to align interests between management team and investors. However, even in cases where there is a simpler arrangement, having economic incentives in place helps to align interests as long as the management teams depends on them.
So, I guess my point is, what we are doing here in the donation space seems to be a very trust based arrangement, where we would need to justify the mechanisms that ensure that interests between management and investors remain aligned if the management team does not depend on the fund surviving. I am slightly worried about this after the whole SBF and FTX debacle. There is/was a lot of good will towards people who seem to have a lot of money and claiming they want to do good with it. How do we make sure that not all of our eggs are in one basket and potential downsides in the case of betrayal or corruption are limited?
I think fees make sense for investment funds because it increases their incentive to make a profit for their customers. But I don’t think a straightforward fee for charitable funds would increase their incentive to have an impact (though perhaps it would increase their incentive to convince donors they are having an impact—but this is still a ‘trust based arrangement’).
That said, I take your point about the problems with trust based arrangements! I feel in the ideal world, charitable funds are funded proportional to the quality of their grants. To some extent, this is what already happens (often these funds are themselves funded by a different funder after conducting some kind of evaluation), but it’s often not public. I’m hoping that Giving What We Can’s work evaluating the evaluators will help provide additional accountability and help donors make a more informed choice about which funds to trust.
Thanks for the reply Michael.
I just wanted to note that I didn’t want to imply or recommend that the fund managers should be payed but rather that there is a reason fund managers are payed. I think this reason was somewhat neglected in the post. I think more of an argument / investigation would be helpful to understand why / find out if the current arrangement is well-thought out.
I think my main concern is that funds tend to centralize funding pretty strongly and this can have positive but also negative consequences in certain situations. Imagine a corrupt fund manager having access to / leverage over hundreds of millions of dollars.
Paul Christiano’s suggestion regarding donor lotteries may be an interesting approach in this regard because it makes the whole thing less interesting for career criminals.
Having said all that I am not overly concerned that this is a pressing issue for the community but still something that should be in the (back of the) mind of people who design such management systems.