Can Fixing the Biggest Bads Accomplish the Biggest Goods?
One dominant idea about how charitable tasks ought to be selected and appraised holds that the neediest of needy prospects available for consideration ought to be given highest priority. Funds available for charitable aid are typically limited, but there are always several feasible alternatives that could benefit from access to the funds. The neediest person benefits most from each unit of a cash hand-out, especially so if the sum is received when it is needed most. So, it seems reasonable enough to think that the neediest prospect one can afford to aid is the best prospect to aid.
Why does this idea enjoy its mass appeal?
Well, if you want to achieve a big, fat, good but have a limited budget it seems apt to stretch the money as far as it goes. If you make a hand-out to the neediest prospect under consideration their wellbeing is significantly enhanced on your account, and you achieve the most good you can per unit of expense you incur in doing so. If your charitable aid budget is larger than the cost of enhancing the wellbeing of the neediest prospect, you can—and should—aid the next neediest prospect/s that could benefit from the remaining amount.
Let the weight of prospect’s need be the metric by which they are accorded priority during selection and appraisal of feasible charitable tasks. Call this method of assigning priorities to feasible alternative charitable tasks the need-weighted priority metric, or need-weighted metric for brevity.
The patent consequences of the need-weighted metric for charitable task selection and appraisal, discussed above, sit well with our innate desire to do good and do it the best we can. But is it actually a reliable metric? Does it ensure the best use of resources available for feasible charitable tasks?
The answer is: NO!
We’ll see why below.
The claim that the need-weighted prioritisation metric picks the best among feasible prospects under consideration for charitable aid is mistaken.
Meeting the needs of the neediest prospect tends to cost more now than the expected future value created by doing so. It also tends to cost more now than attending to other feasible alternatives that both require lower expenditure now and generate greater expected future value subsequently. By allocating funds available for charitable aid to the neediest prospect one enriches the prospect by impoverishing other market participants; transferring a currently preventable net worth loss to a future period where it is unpreventable.
Need-Weighted Prioritisation of prospects undervalues the costs of charitably aiding the neediest now while it overvalues the expected future value of doing so. The good actually achieved, thus, is worth less than the costs incurred in achieving it.
The 2 part case study below illustrates these problematic traits, and demonstrates the mechanics, of value destroying charitable tasks typically accorded highest priority by the need-weighted metric.
Abaskuul and Abtidoon are 4 year old orphans residing in a region where the life expectancy for males is 53 years, and the average monthly income is $50. If Abaskuul and Abtidoon start working at the age of 18, i.e. in 14 years, and work till age 53 their expected lifetime earnings at the average monthly income [assuming $0 savings and no raises, for simplicity] amounts to 468months * $50 = $23400 each. It costs $200 per month to support a child and make them employable, so the expected cost of caring for either Abaskuul or Abtidoon till 18 years of age [assuming 0% inflation, and no changes in market prices, for simplicity] is $33,600. Accordingly,
a. NPV (Abaskuul’s expected lifetime earnings) < FV (Cost of sponsoring Abaskuul), as
$23400 < $33,600.
b. NPV (Abtidoon’s expected lifetime earnings) < FV (Cost of sponsoring Abtidoon), as
$23400 < $33,600.
A would be do-gooder Mr E. A. holding to the common sense view must accord them both equal priority as prospects. That’s because the
NPV (Abaskuul’s expected lifetime earnings) = NPV (Abtidoon’s expected lifetime earnings)
If Mr E. A. sponsors any one of the two boys for 14 years he pays $33,600 starting right now and his sponsorship realises the expected future value of $23,400 at the end of year 14.
Whether one sponsors Abaskuul or Abtidoon, one makes a loss of $10,200; a 30.29% loss on $33,600! This loss on charitable aid, equal to the value destroyed by Mr E. A, indicates that charitably aiding either prospect is not the most effective charitable use of $33,600.
Sponsoring either prospect is equivalent to paying $33600 over 14 years to collect $23,400 at the end.
Presumably, if at another time and in another context, Mr E. A. were offered a deal promising him $69.71 in 14 years if he paid up $100 now, he’d refuse. So, it stands to reason he must dismiss the opportunity to aid these prospects. Sponsoring Abaskuul, or Abtidoon, is an ineffective charitable act Mr E. A. can perform only by depriving himself and other market participants of $10,200 over 14 years. Therefore, he must refrain from sponsoring either of these prospects and look for feasible alternatives.
Effective charitable use of a given amount today subsequently creates a greater expected future value than the present value of costs incurred in making it.
Suppose Mr E. A. only has $33600 available to commit to charity and must choose to sponsor only one of Abtidoon or Abaskuul. Furthermore, Abtidoon is diagnosed during this period to have contracted acute malaria, and the expected cost of a full course of treatment is $200. Then,
a. NPV (Abtidoon’s expected lifetime earnings) is $23,400 – $200 = $23,200. Stated another way, NPV (Abtidoon’s expected lifetime earnings) = 1 / 1.02 * 23,400 = 23,200.
b. NPV (Abtidoon’s expected lifetime earnings) < NPV (Abaskuul’s expected lifetime earnings) as $23,200 < $23,400.
Abaskuul, who enjoys a higher NPV of expected lifetime earnings if sponsored by Mr E. A., is better off than Abtidoon. Abtidoon is worse off even if he is sponsored by Mr E. A., because of the 1 / 1.02% decrease in the NPV of his expected lifetime earnings due to acute malaria.
If Mr E. A. helps only the neediest of his feasible prospects, then as Abtidoon is 1.02 times needier than Abaskuul, he must sponsor Abtidoon. In fact, Mr E. A. must accord 1.02 times greater priority to charitably aiding Abtidoon than he does to Abaskuul. Alas, for Mr E. A. every 1 / k unit decrease in the NPV of a prospect’s expected lifetime earnings bumps up their priority by K units; and, with every k unit increase in NPV of a their expected lifetime earnings their priority decreases by 1 / k units.
As section 2 illustrates, prioritising charitable aid to needier, lower NPV prospects, destroys the expected future cash value equivalent to the difference of the costs incurred in providing charitable aid and the return generated by doing so.
Priority accorded to a prospect relative to feasible alternatives must be commensurate with its future return to present cost ratio relative those of feasible alternatives.
Prospects with the highest ratio of future return to present costs must be accorded highest priority while selecting and appraising feasible charitable tasks.
Contrary to recommendations of common sense, and need-weighted prioritisation metrics like the one discussed:
The neediest prospects among feasible alternatives do NOT make for the most suitable recipients of charitable aid.
The neediest prospects among feasible alternatives should NOT be accorded higher priority than alternatives that cost less to aid, and bear greater expected future return subsequently—on pain of destroying value.