When I talk about the poor distribution of funds in charity, people in the effective altruism movement sometimes say, "Didn't Holden Karnofsky show that charity is an efficient market in his post Broad Market Efficiency?"

My reply is "No. Holden never said, and doesn't believe, that charity is an efficient market."


What is an efficient market?

An efficient market is one in which "one cannot consistently achieve returns in excess of average market returns... given the information available at the time the investment is made." (Details here.)

Of course, market efficiency is a spectrum, not a yes/no question. As Holden writes, "The most efficient markets can be consistently beaten only by the most talented/dedicated players, while the least efficient [markets] can be beaten with fairly little in the way of talent and dedication."

Moreover, market efficiency is multi-dimensional. Any particular market may be efficient in some ways, and in some domains, while highly inefficient in other ways and other domains.

Charity as an inefficient market

Financial markets are relatively efficient. It's rare for players to consistently beat the market by a large margin. You can beat the average by investing in a low-fee index fund, but not by a lot, and it's hard to beat hedge funds.

Philanthropic markets appear to be less efficient than financial markets in many ways. In charity, one can consistently beat the market by a wide margin simply by giving to GiveWell's recommended charities, which achieve far greater returns (in social value) per marginal dollar than the average charity does. However, Holden points out that it has been surprisingly difficult for GiveWell to find ways to beat well-run large foundations like the Gates Foundation's work in global health.

Why should we expect charity to be less efficient than financial markets?

For one thing, most people giving to charity don't even seem to care what returns (in social value) they're getting with their investments. That's why, when proto-GiveWell initially contacted a bunch of charities to ask for evidence of positive impact, some of those charities reported that nobody who gave them money had ever asked that question before. And when charities sent proto-GiveWell their internal reports about effectiveness, they were so inadequate that they "led [proto-GiveWell] to understand that the charities themselves did not know whether they were helping or hurting a given situation" (Stern 2012).

For another thing, "market incentives of the nonprofit world push charities toward happy anecdote and inspiring narrative rather than toward careful planning, research, and evidence-based investments" (details here).

Also, as Brian Tomasik notes, "Efficiency in the realm of charity is inherently less plausible than in financial markets because in charity there’s not a common unit of what 'good' means... Indeed, one man’s good may be another man’s bad (e.g., abortion, gun control, extinction risks)." But even when we focus on relatively common units of 'good' (e.g. human welfare, QALYs, or DALYs), charity is still relatively inefficient: we can easily purchase more QALYs per dollar via AMF than via, say, the popular Make-a-Wish Foundation.


What is "broad market efficiency", then?

If Holden agrees that philanthropic markets are relatively inefficient in the sense that it's easy to consistently and substantially beat average market returns by giving to GiveWell's recommended charities, then what does he mean by "broad market efficiency"? Holden introduces "broad market efficiency" as a term for the spectrum of market efficiency, but remains uncertain as to where charity falls on that spectrum of market efficiency.

Brian Tomasik worried that the term "broad market efficiency" would confuse some readers into thinking Holden was claiming that philanthropic markets are relatively efficient and thus that "it doesn’t really matter where you donate." Holden said he wasn't worried about this, saying, "I don’t think 'broad market efficiency' is a common phrase or one with a clear meaning." But I think the phrase is confusing, that many readers interpret it as meaning "market efficiency," and indeed that people in economics and finance sometimes use it that way: search for the phrase "broad market efficiency" here, here, here, and here.


The research ahead

So how efficient is the charitable market, and in which ways? My own guess is that it's far less efficient than financial markets, but GiveWell's research has provided valuable and surprising (to me) information on this topic, and I look forward to future discoveries.

New to LessWrong?

New Comment
12 comments, sorted by Click to highlight new comments since: Today at 3:43 AM

For one thing, most people giving to charity don't even seem to care what returns (in social value) they're getting with their investments.

To be fair, Givewell itself is getting increasing amounts of attention, and there have been other charity-effectiveness-related organizations like Charity Navigator. I suspect it's more accurate to say that people don't think to evaluate charitable effectiveness rather than that they're uninterested. How many of us came up with the ideas behind effective altruism ourselves as opposed to hearing them from someone else?

The few times I've talked to conventionally altruistic people about EA, I've succeeded in convincing them that it was an interesting and useful way to think about things, at least, without too much effort. It can be hard to convince people to become EAs, but I suspect it's the altruism part that's hard, not the effectiveness part. (This suggests that conventionally altruistic people, e.g. vegetarians or soup kitchen volunteers, might be good people to recruit for the EA movement.)

Anyway, another reason we'd expect financial markets to be more efficient than charitable markets is that top players in financial markets tend to accumulate more capital, which consequentially makes them bigger players who have more influence on the market. Also, you can't do arbitrage, buy options, or any of that kind of stuff.

I suspect that the charitable market is pretty efficient in terms of private returns to its donors. I don't think there are easy ways to get above-average social kudos for your donation.

If the charitable were market more efficient in terms of promoting the kinds of "human welfare" mentioned in the OP, it would likely be less efficient in terms of private returns to donors. Given that feedback in the charitable market is from (potential) donors, not recipients, the fact that we see one kind of efficiency, but not the other, is strong evidence that "Charity is not about helping."

When I talk about the poor distribution of funds in charity, people in the effective altruism movement sometimes say, "Didn't Holden Karnofsky show that charity is an efficient market in his post Broad Market Efficiency?"

Since we're talking economics the revealed preferences of Holden would seem to say quite emphatically no. If the market was efficient givewell would be (largely albeit not quite stictly) unnecessary and would be expected to give the charities the rating "equal first" a lot.

Unusually non-willpower-sapping/not-a-slog for an EA/markets post.

I indeed found 'broad market efficiency' confusing and would expect others to, too.


It seems like the ideal EA post would inspire you towards effective altruist action, not sap your willpower. If anyone is willing to introspect on why the EA stuff they read saps their willpower, I would be really interested to hear more about this.

I thought about this a few times shortly after your subcomment, and in passing in the intervening months, and could identify lots of possible factors but not a firm conclusion as to the main ones. I do notice now that I find EA stuff less difficult to read now, which makes me think that part of it was simply that the learning curve was a lot steeper at first. I still don't find it as easy to read as, say, FAI and x-risk posts, so I think it might also partly be a matter of where my interests and inclinations lie right now (it might change if I actually study EA and get up to speed more properly, or absorb it more over time). But in terms of blocks to reading, out of those two, the learning curve is the actionable one.

Thanks for the info!

Charity does not violate the efficient market hypothesis. It is efficient. It's just that it's not a market for helping people.

Maybe it's worth very quickly brainstorming for alternative catchphrases to "broad market efficiency".

The relevant conclusions I take from Holden's blog post are that (1) it's hard to tell which charitable opportunities are under-funded, and (2) most plausible-sounding opportunities already get non-negligible funding. This sounds to me more like market thickness than efficiency as such, so maybe "broad market thickness" or "broad market depth" would be better catchphrase summaries.

Paul Christiano discusses Holden's argument in The efficiency of modern philanthropy. His main claim is that

the case for “efficient philanthropy” is relatively weak. I think the largest gap between philanthropist’s incentives and the public good is the philanthropist’s desire to make decisions that look good in retrospect, and that this gap could well cause many of the most important philanthropic interventions to be left on the table. I think the evidence Holden and others cite doesn’t bear significantly on this hypothesis.

It seems like the tax advantages of having 501(c)3 nonprofit status should give charities a competitive advantage over for-profits. I wonder what holds them back from taking over entire industries? Are they significantly less efficient than for-profit businesses? Or is it the fact that donors cannot receive dividends and thus lack incentive?

It might be worth pointing out that in some time and places, charities (often, read: "religious organizations") have done quite well for themselves, to the point of national conflict. You have the Church in England before King Henry, you have the Islamic world's waqfs, you have the monasteries in Japan with their well-known conflicts with secular rulers, apparently the bonyads of Iran control 20% of Iranian GDP (!), and I've read occasional mention that part of Egypt's economic malaise is due to Islamic charities (with consequences like far too many theology students, due to expectations of getting jobs doling out dole).

So, it is certainly possible for immortal tax-exempt entities with laudable goals to become large powerful entities.

Why doesn't this happen in the US or most of the West? I'm not sure, but I suspect mandatory disbursement requirements (I think it's something like 501c3 charities need to spend 5% of their net worth each year) may be a major factor.