Philanthropic diversification

Philanthropic diversification is the practice of allocating donations to multiple charities rather than the single charity with the highest expected value.

There are prima facie strong reasons for a risk-neutral donor seeking to maximize the expected value of their donation to donate to only one charity. It may seem as though, if the donor believes their first dollar will do the most good if donated to some charity, they should also donate the second dollar to that charity, and so on until they run out of dollars to donate.[1]

However, there are a number of reasons why diversifying donations may sometimes be justified.

First, new evidence may change a donor’s mind about the charity which can most effectively use their donation.

Second, given uncertainty surrounding the effectiveness of charities, donating to multiple charities reduces the risk of a donor’s donations having little or no impact. Even risk-neutral donors can become demoralized upon finding out that their charitable donations had much less impact than initially expected.

Third, being an active donor to multiple charities may make it easier to obtain more information on each of them. This is useful for prioritizing future donation decisions, and spreading the word to others.

Fourth, when a donor gives a very large amount, or gives to a very small charity, the donation will experience significant diminishing marginal returns, to the point where it is no longer the option with the highest expected value.

Finally, if everyone simultaneously gives to the charity they believe is best, this may mean that the group donation is sufficiently large to result in diminishing marginal returns, again leading to a suboptimal outcome. This final reason highlights the importance of donor coordination.

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