The all-or-nothing fallacy

This week Blizzard Entertainment announced a new World of Warcraft virtual pet for charity.  Last November they had introduced a $10 pet and promised to donate half of the proceeds to the Make-A-Wish foundation.  The results were:

  1. They raised $1.1 million for Make-A-Wish.
  2. Bloggers everywhere were outraged that they would dare do such a thing.

Why such anger?  A part of it stemmed from the fact that Blizzard only offered 50% of the proceeds rather than 100%.  To some people, you either do something for profit, or you do something for charity, and you should never mix the two.  A similar type of outrage gets directed toward nonprofit CEO’s for making, say, a $500k annual salary when they could easily make twice or more in the corporate world.  “You only took a 50% pay cut?  Imagine how much good you could do if you took a 95% pay cut and lived at a $50k level like the rest of us!”

I find this kind of black-and-white thinking unhelpful in trying to address real-world problems.  To illustrate the shades of gray, let’s consider the following scenario — a disaster has struck a neighboring town, and they need food badly.  You want to get involved, so you buy food and bring it to the stricken residents.  How do you price the food?

  1. Free / no cost.
  2. Your cost basis (no profit).
  3. 10% markup for your own profit
  4. 200% markup for profiteering
  5. 200% markup and sabotage other relief workers to drive up demand for your food.

We’d all agree that the list goes in decreasing order of goodness, and at some point it stops becoming charity and crosses over to evil.  But for someone who was planning one course of action, moving a notch up the list is an improvement.  It might not be charitable in an absolute sense, but it’s more charitable.

In his post Just Lifestyle: Four Options, Gary alluded to this story about Mother Teresa.  A rich woman was moved by Mother Teresa’s work and wanted to follow in her footsteps.  Sensing that it would be too big of a change and hard to keep such a commitment, Mother Teresa asked how much the woman spent on her sari.  “800 dollars.”  Mother Teresa then suggested the woman spend only $700 on her next sari, and give the remainder to the poor.  And slowly reduce from there.

Giving is not an all-or-nothing affair — just move in the right direction.  Lately I’ve been thinking about how to reallocate investments, and I came up with the following list in order of decreasing goodness:

  1. Direct charitable contributions
  2. Invest in kiva.org, making no profit and creating microloans for the poor
  3. Invest in microplace.org, making some profit and creating microloans for the poor
  4. Invest in stocks, bonds, and CD’s, making profit (possibly)
  5. Squander it in a historical reenactment of The Prodigal Son

Hey, we all gotta start somewhere.

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4 thoughts on “The all-or-nothing fallacy

  1. Great post, Ed.

    I’ve invested quite a lot of money (by my standards) in both Kiva and MicroPlace, but lately I’ve been thinking of moving it all to MicroPlace. I have a hunch that the overhead is probably lower for the lending NGO on MicroPlace because they need to submit fewer individualized reports to donors. I like the way Kiva puts a face with my investment, but I’d rather have more money go to people who need it.

    For the same reason I don’t “sponsor a child” with World Vision–I just give to the organization directly. Thus, I wonder whether MicroPlace should be #2 and Kiva #3 even though you make a bit of money through MicroPlace. Thoughts?

  2. Hi Ed,

    I used to go to CCFC and know Gary from there. Also, I’m an economics PhD student at the University of Chicago who is generally very interested in the economics of charitable giving as a lay consumer of the literature.

    Thanks for this post. I think your observation about the all-or-nothing fallacy ties in to a the work of social psychologist Ann Cuddy at Harvard Business School. (http://harvardmagazine.com/2010/11/the-psyche-on-automatic) According to her framework, people categorize other people in terms of being warm/cold and competent/incompetent, and that people focus on examples of being “cold/not nice” as being representative of character more so than examples of being warm/nice. On the other hand, people focus on examples of competence more than examples of competence… so that if I see someone else doing something competently, I think that that person is overall competent but if I notice that person doing it incompetently I would usually think that it’s just not a learned skill.

    I think the Blizzard Entertainment example illustrates that relative to the reference point of being “warm/nice” the portion that went to profit conflicted with the “warm/nice” story which people fixated on.

    Also, Nick Kristof, who I think is the secular preacher of the “Simple Giving for Just Giving” ethos, recently published a list of lesser-known organizations working on great causes. http://kristof.blogs.nytimes.com/2010/10/20/how-to-change-the-world/ . I haven’t done a lot of due diligence, but he points out some lesser-known causes.

    RE: kiva.org… I’ve done some some thinking about MFI-related nonprofits like Kiva.org … He and many other people really like outfits like Kiva.org that provide subsidized credit to the poor in developing countries, but I think there are more questions we need to ask of microfinance-related organizations like Kiva, BRAC, Grameen, etc. before we can proclaim them to be a “panacea” of global poverty… for example, to my knowledge, Kiva.org does not report the interest rates that the MFIs charge to the individual borrowers. They state on the website that they have an internal monitoring system that ensures “fair” interest rates, but as an economist, I’m curious as to how Kiva defines “fair”… banks, courts, and mortgage lenders in the US have enough trouble defining what a fair mortgage interest is (i.e. not usurious) given the limited information we have about the borrower.

    I ask because the implication is that because Kiva.org + we lenders are providing subsidized credit (i.e. free credit) to these MFIs, and these MFIs are turning around and lending it out to borrowers, the MFIs can easily take that interest rate spread and keep it for themselves as profit rather than using the subsidy to lower interest rates or expand their reach to the poor. (I don’t think all the partner MFIs are nonprofit…and even if they were it’s quite easy to slide extra money into program expenses in a budget report.)

    Anyways, I don’t mean to imply that Kiva.org and its partner MFIs are all engaged in corrupt/unjust practices, I want to point out a problem that is common to most other charitable nonprofit activities in the developing world… the problem of monitoring/asymmetric information. I think the real value-added of orgs like Kiva and other well-meaning nonprofits is to increase transparency and fix the problem of asymmetric information to a greater degree… and to the extent that Kiva and other orgs are not doing that I’m suspicious of how much “good” this subsidized credit is actually achieving. This is in light of the fact that recent experimental and non-experimental evaluations of microcredit give mixed results or no result in terms of increased welfare of the family/household.

    Anyways, I actually wrote an essay about the economics of Kiva.org for a class…happy to share it with anyone who’s interested in reading it.

    Regards,
    Christina

    • Hi Christina,

      Thanks for your thoughts and links to more info. Regarding how people perceive others on the warm/cold and competent/incompetent axis, I think that one problem with raising awareness on effective giving is that when it comes to money, people often conflate competent and cold. In fact, in the Cuddy article you linked, she writes: ““People tend to see warmth and competence as inversely related. If there’s a surplus of one trait, they infer a deficit of the other.” And it’s not an entirely unfair generalization, as most rich people have gotten that way by being cold and calculating. Gary and I had a discussion in which he told me about a book that explained why it’s hard to get rich in some African cultures — it’s considered rude and anti-social to withhold any of your belongings from your neighbor. That makes it hard to build up wealth or even run a normal business.

      As for the monitoring and compliance issue, that’s huge. My wife June did an internship for a multinational corporation in that division, and now works for a foundation where compliance comes up. Maybe I can get her thoughts on it. I think it’s a subset of a larger issue: “how do you know where your charitable dollars go?”

  3. Thanks, Gary. I don’t have any hard numbers on how much kiva spends on overhead. If it’s more than the profit made off MicroPlace, then you’d be right. On the other hand, maybe kiva’s approach gets more people involved, so it’s good publicity and an easier gateway for people to get involved in philanthropy or microlending.

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