# The Donor's Dilemma: The Time Value of Money and Maximizing Effectiveness

Mar 7 201610 min read 10

# 6

The Donor’s Dilemma:

Smith has \$10,000 that he’d like to do the most good with as possible.  He is considering donating it immediately to the most effective charity he can find, but he realizes that he could invest the \$10,000, and assuming a mere 5% return, he would have even more money to donate next year.  However, he would again face the same predicament next year.  In fact, so long as his rate of return exceeds the inflation rate, he will always be able to increase the amount of his donation in real dollars by investing the money rather than donating it immediately.  Over time, he could possibly double or even triple the amount of good he could do.  What should Smith do?

This is a dilemma that, whether recognized or not, faces everyone who decides to donate to charitable organizations.  In most markets, it is not particularly difficult to realize a rate of return that exceeds the inflation rate.  This fact means that a dollar today is generally worth more than a dollar tomorrow because a dollar today can be invested and will be worth more than a dollar when tomorrow arrives.  In economics, this concept is referred to as the time value of money.  The time value of money is a very powerful tool for young people who wish to save for retirement, but it could potentially be paralytic for even the cleverest of donors.

In this article, I hope to give some deeper analysis to this problem.  I am going to evaluate the severity of the problem (how much larger could Smith’s donation actually become?) and suggest some possible ways of thinking about various giving opportunities that might be relevant to a person in Smith's situation.

How Severe is the Problem?

If Smith were to invest his money and donate it at a future date, he could likely have more money to donate, and this might possibly allow him to do more good.  However, in order to know how severe a challenge this presents, we must understand how much more money Smith could potentially have by waiting and investing.  This is a basic calculation:

FV = CV*(1+(RR – INF))^N

FV = future value of Smith’s money

CV = current value of Smith’s money

RR = annual rate of return

INF = inflation rate

N = number of years Smith plans to invest

While there is certainly no great mystery regarding these calculations, the time value of money can turn out to be quite powerful.  For the below scenarios, I’m assuming a 3% inflation rate, which may be a bit high.

• If Smith is 25 years old, and he can obtain an 8% rate of return for the next 50 years, he would have just shy of \$115,000 in real dollars.
• If Smith is 40 years old, and he can obtain a 5% rate of return for the next 15 years, he would have about \$13,500 in real dollars.

If Smith is a 25 year old who is a decent investor, he has quite a problem on his hands.  In order to donate the money today rather than invest it, he needs to believe that a donation today will be almost twelve times more effective per dollar than a donation in fifty years will be (\$115,000 is almost 12x \$10,000).  If Smith doesn’t believe a donation today will be almost twelve times more effective per dollar than a donation in the future, he should invest the money and perhaps reevaluate at some point in the future.  Forty year-old Smith faces a much smaller challenge, as his donation today only needs to be about 74% as effective per dollar as a donation in fifteen years (10000/13500).  The scope of this problem is highly sensitive to the specific facts in a given case.  The longer the timeframe and the higher the rate of return, the larger the problem becomes.

This presents a potential infinite progression.  If Smith can net a 5% return each year in real dollars (RR minus INF), then there must be a present donation option that is at least 5% more effective per dollar than any donation option that will be available next year in order for him to donate this year.  If there is no such option, it is possible that he should wait until next year.  However, this argument would continue to hold so long as no such donation option is available.  In fact, it is possible that Smith should never donate any money to charity in his lifetime, but should instead simply make an effective charity the recipient of his life savings in his will.  As there are likely legal ways to ensure the process continues even after his death, however, it is not clear that Smith dying should even be a good reason for Smith’s money to finally be donated.

Should EAs Ever Actually Donate Money?

I must confess that I am skeptical of the idea that EAs should simply will their money to charity after their deaths, and I think most EAs would share my skepticism.  However, I also have doubts that we are doing a good enough job of eliminating the low hanging fruit of the charitable world to render this year’s options 5% more effective per dollar than next year’s options.  I am not entirely convinced of that second point, though.

It seems as though the most pertinent question to ask here is which EA causes are most likely to exhibit diminishing opportunities over time?  There are certainly some types of causes that result in new breakthroughs, and those breakthroughs bear fruit from that point forward.  Speeding up the development of those breakthroughs certainly could result in a donation that is 5% more effective per dollar than the same donation would be a year later.  For example, let’s imagine that in vitro meat could become a commercial reality in one year if \$500 million were invested today.  Further, let’s assume that it would entirely eliminate the need for 10 billion factory farm animals to suffer every year.  This would be a highly leveraged donation opportunity, as moving up this development by one year would spare the suffering of 10 billion animals – an accomplishment that is undoubtedly worth \$25 million (5% of \$500 million) – a cost of just ¼ of one cent per animal.  It is probably hard to put actual numbers to the in vitro meat case, but this example at least demonstrates that breakthrough type causes do in fact have the potential to offer significant premiums in the present.

There are also causes that might be time-constrained.  For example, the machine singularity problem could turn out to be a sort of ticking bomb problem, and it might be the case that we need to solve it before a certain date or else face severe consequences.  Since it is unlikely that we can know when that date will be exactly, nor how long it will take to solve the problem, it could reasonably be argued that the stakes are simply too high to wait an additional year for only a 5% increase in resource availability.  It may in fact be better to donate \$10,000 today than to donate \$16,200 in ten years (10,000*(1.05^10)).

Direct aid programs seem to present a unique challenge in the donor’s dilemma, however.  By “direct aid,” I mean to include some highly effective programs such as the Against Malaria Foundation, along with just about any program that is designed to take care of an existing problem in the present.  There is certainly a large amount of variation among these programs, so I think it may be most useful to give a description of the sorts of features that are most problematic in the donor’s dilemma.  In other words, insofar as we accept the conclusion of the donor’s dilemma, there are a couple features that might make us want to hold off on our donations:

• There is no resolution to the problem being solved.  The Schistosomiasis Control Initiative (SCI) is a very effective charity that provides de-worming services to individuals living in sub-Saharan Africa.  There is no doubt that removing these parasites greatly improves the quality of life for affected individuals, but a prospective donor could possibly reason that he or she could provide treatment for 5% more people by investing and waiting until the next year.  Of course, this reasoning could lead to an infinite progression, leaving us with the question of whether we should ever donate to SCI.  I obviously think SCI is a worthy cause, but the fact that it doesn’t actually resolve the problem of parasitic worms means there will likely be just as much opportunity for de-worming donations next year as there is this year.
• The direct aid is temporary.  The Against Malaria Foundation (AMF), which is currently the highest-rated organization on Give Well's list of recommended charities, distributes bed nets to individuals in sub-Saharan Africa for the purpose of preventing malaria.  There is no question that AMF is a well-run organization or that the amount of good they can do per dollar is quite impressive.  However, it is also likely that the bed nets they provide will eventually be lost, wear out, etc.  At some point in time, even if it is ten years from now, some people who currently have an AMF bed net will likely no longer have one.  This means that there will again be an opportunity to give that person a bed net.

The main feature these two characteristic have in common is that they create a scenario in which there is not a diminishing opportunity for doing good.  If there is a diminishing opportunity for doing good, we might have good reason to seize the opportunity in the present.  However, insofar as we are convinced by the conclusion of the donor’s dilemma, having an equal opportunity to do good next year implies that we should invest our funds and reevaluate the situation later, thus having more resources despite good opportunities being just as available.

Objections

As I believe both AMF and SCI to be doing good work that is worthy of funding, I hope to find some strong objections to the conclusion of the donor’s dilemma.  Here are a few I’ve considered:

There is too much epistemic uncertainty about future opportunities for us to assume that opportunities presented by organizations like AMF or SCI will still be available.  This is certainly true, and it is also possible that broader development will eliminate these causes altogether.  It is certainly possible that sub-Saharan Africa will at some point see enough economic development that mosquito nets will either not be necessary or will be purchased by individuals themselves from their local market.  It’s also possible that AMF and SCI will do a good enough job that their pool of eligible individuals will shrink significantly from where it is now.  However, it is also possible that neither of these are the case.  Further, it's possible that some clever effective altruist devises an even more effective direct aid method that can do even more good with fewer resources.  We are making assumptions either way, and both positions come with potential risk.  If we choose to donate now, we are risking the opportunity to help additional people in the future.  If we invest rather than donate, we are risking the possibility that some people die because they did not have bed nets (or suffers from a lack of de-worming services), and that these problems will reach some resolution on their own, leaving us with a lot of cash but no equivalent opportunities.

The donor’s dilemma is just stupid, and we should think of it like Pascal’s mugging.  A cursory reading of Pascal’s mugging might leave us willing to wager something of real value in exchange for an incredibly slim chance at something with a ridiculously high yet arbitrary value.  We recognize those sorts of situations as being absurd, even if it is difficult to quantitatively identify why we shouldn’t gamble \$5 in exchange for a one in a million – or even a one in a billion – chance at eternal happiness.  Perhaps we should relegate the donor’s dilemma to the same bin.  While I am somewhat sympathetic to this critique, I think a critical difference between thought experiments like Pascal’s mugging and the donor’s dilemma is that the donor’s dilemma is very practical.  It involves a very real set of alternatives that are realistic for most donors.  It doesn't make any crazy assumptions, and it's hard to identify what component of it is actually absurd.

If EAs do their job well, the price of doing good will be much higher in the future than it is currently.  We probably have good reason to think this is true.  As more people identify as EAs, and more money is poured into effective organizations, it is hopefully true that the low hanging fruit is eliminated.  It may not be possible to save a life for \$3500 in the year 2040.  I certainly hope this is true, but it must be pointed out that this effect must be quite powerful in order to outpace the growing resources of a savvy investor.  A 5% real rate of return is quite a lot, as evidenced by the 25 year old Smith who will see his fortune increase almost twelve-fold over the course of forty years.  Accepting this objection requires us to make certain assumptions about the pace of EA growth and the movement’s effectiveness, and there are significant risks in both accepting and rejecting those assumptions.

Conclusion

I don’t exactly know what to make of the donor’s dilemma.  I don’t believe that EAs should either be investing solely in breakthrough type causes, such as in vitro meat, or saving all of their pennies until they eventually bequeath their nest egg to an effective organization.  I am perhaps less certain of this than before, though.  I must confess that, when taken in simple terms, there is an aspect of the donor’s dilemma that seems sensible to me.  I’m quite certain that in one year there will still be enough opportunity for me to donate to the AMF, and I’m pretty certain that the AMF will be about as effective per dollar as they are this year.  Since I am also pretty sure that I can beat inflation with my investments, I am not so sure that it is crazy to say that I should invest rather than donate this year.  However, I’m keenly aware that if all donors were to take this approach, the AMF likely wouldn’t exist.

I’m eager to hear further objections from the EA community.  What should we make of the donor’s dilemma?  Should we even take it seriously?

# Reactions

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Thanks for addressing this. I definitely think we should take it seriously.

I thought I'd link back to some past perspectives on this question:

Thanks for those links. I was quite certain that this problem had probably been identified before, but I was unable to find anything written on it.

Also see this summary page on giving now vs. later: http://www.effective-altruism.com/ea/4e/giving_now_vs_later_a_summary/

That’s a very interesting topic that a lot has been written about without any clear credo emerging. Thanks for tackling it!

One observation: I think all GiveWell charities exhibit diminishing opportunities over time. Universal distributions as AMF conducts only make sense when intended as vector control intervention. Targeted distributions are about protecting people; with universal distributions, protecting people becomes a side effect. Primarily the people are the bait that is used to kill mosquitoes to disrupt the life cycle of plasmodium falciparum and vivax, and permanently get rid of malaria. That is not likely to be achieved soon or through LLINs alone, but it leads to diminishing opportunities. On the negative side, mosquitoes develop resistance against the currently known insecticides, which also diminishes opportunities in the future. SCI probably works similarly.

But just as with cultured meat (or egg white), vaccines, gene drives, and all that newfangled stuff can be a reason to invest into research or wait and donate more once these things can be scaled up.

Another observation: In the realm of altruistic, agent-neutral public good investing, I would hope to see no competition for impact, just cooperation. (I’m not referring to the ill-incentivized competition of funding of nonprofits.) In practice there is probably some competition but not much compared to the competition for profit in the for profit realm. The only real competition is with anopheles, schistosomiasis, STH, and some harmful memes, and the parasites’ aptitude at using their rapid evolution against us.

Hence, in order to create impact, you “only” have to understand nature, including human culture, and you can cooperate with countless others on achieving that. But to make profit, you have to understand nature too, and do so faster than others and maintain that speed. So I think it’s inherently harder.

Rather, we’re probably limited to the baseline you use, that of average economic growth. Developing countries have a lot of room for such growth, and studies have rumored that deworming and malaria elimination are linked to economic growth. If that’s at least partially a causal link (or even a feedback loop), we’re having part in this very economic growth too.

So we can probably beat those dumb parasites more easily than we can beat the for profit market, and we’re earning some of the 5% growth too, eroding whatever advantage for-profit investing it may have on direct investing.

One example of the ROI through deworming via Poor Economics:

In Kenya, chil­dren who were given de­worm­ing pills in school for two years went to school longer and earned, as young adults, 20 per­cent more than chil­dren in com­pa­ra­ble schools who re­ceived de­worm­ing for just one year: Worms con­tribute to ane­mia and gen­eral mal­nu­tri­tion, es­sen­tially be­cause they com­pete with the child for nu­tri­ents. … For ex­am­ple, the study of the long-term ef­fect of de­worm­ing chil­dren in Kenya, men­tioned above, con­cluded that being de­wormed for two years in­stead of one (and hence being bet­ter nour­ished for two years in­stead of one) would lead to a life­time in­come gain of \$3,269 USD PPP. Small dif­fer­ences in in­vest­ments in child­hood nu­tri­tion (in Kenya, de­worm­ing costs \$1.36 USD PPP per year; in India, a packet of iodized salt sells for \$0.62 USD PPP; in In­done­sia, for­ti­fied fish sauce costs \$7 USD PPP per year) make a huge dif­fer­ence later on.

So to me very good opportunities through innovation in the future seem like the best argument for donating later.

That is really interesting about the improved economic prospects for dewormed children. That is indeed a strong argument for deworming this year rather than next year. These sorts of considerations need to be part of our analysis. It is unlikely that all methods of direct intervention will exhibit this sort of return, so it would seem that this ought to be part of our process when deciding which direct causes to donate to.

Echoing the Cotton-Barratt & Todd 2015 link too. If you give to the worlds poorest, their available personal investment options are much better than the stock market both in financial returns and wellbeing returns.

Has anyone calculated a rough estimate for the value of an undergraduate student's hour? Assume they attend a top UK university, currently are unemployed, and plan to pursue earning to give. Thanks in advance for any info or links!

I wonder if an implication of your section on direct aid is that we should invest more in developing long term solutions (e.g. cure or eradicate malaria) than on direct solutions (e.g. provide more nets) as eradicating malaria would yield well-being dividends well into the future. Although interventions such as deworming are effective means of keeping kids in school, thus improving education thus removing people from poverty, so there are longer lasting impacts than just the short term well-being boost.

I think there are some psychological objections too:

Investing with the intent of donating later will not have the same impact of encouraging other donors.

Humans can change their minds, and one of the benefits of donating now is you are hedging against the possibility that you will become less inclined to donate in the future.

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