Comparing donations to large scale charitable organizations vs donations channeled through the pay it forward model.

Most of the posts you will read on this blog relate to either technology, law or business and I’d thought I would change that today by discussing something in the realm of charitable endeavors that I believe in. Charity — by definition — is the act of giving to those in need who are non-relations of the giver. Relative to this definition, this means giving to a family member is not a charitable undertaking as such an act would been done regardless. No, charity must have that critical variable of non-relation to be truly a charitable undertaking. In social psychology, this typically raises the presumptive notion of a charitable gift economy such that a valuable item or service is provided to a non-related entity without any explicit agreement or quid pro quo — that is, there is no consideration provided by the donee to the donor.

The question I have often asked myself is — does this work and is it effective? Are charity’s truly an optimum and effective methodology of providing assistance ? Evidently, the question must be answered in the affirmative — charitable institutions are by enlarge extremely important organisations to assist those in need — not because of the wealth they generate from donor’s but rather because they are effective distributive mechanisms which have large networks that are able to dispense resources to those in need quickly. In my opinion, most large charitable institutions should idealistically therefore be modeled on concepts two primary concepts. Firstly, that of pure altruism — the selfless concern for the welfare of others by being motivated to act without any reward — and secondly, that of duty — the evident concern for others juxtaposed against the rationalization of one’s moral being. Indeed, I write should be because while many charitable organisations are hugely reliant on these two principles — they are by no means definitive.

Most charitable organisations required large donations to survive and only the second limb mentioned above is the one capable of manipulation — the moral being. In this light, there is no question that game theory is an important element to charitable donation paradox both the perspective of the charity and from donor’s. That is, the probability of a donor providing a valuable item or service to a charitable organisation is motivated and positively correlated by the choices of others around them. For example, this is highly prevalent in the corporate donor sector — a business will become a donor only in response to another business becoming a donor with the hope that their net benefit from the donation will ultimately be more positive than the first-to-move. Similarly, one person donating because another person is donating in order to achieve some greater outcome benefit. Evidently, such notions of giving are a considerable distance from those first core principle mentioned in the prior paragraph but are none-the-less a critical facet of the charitable-donor relationship due to the corporate sector typically donating the largest sums of money. Unfortunately however, while you might think this has a positive net benefit — it can also lead to a reduction in overall donations since game theory is an entirely reactionary model. This infers that one’s intentions and strategy are modified by others — which can lead to a reduction in net benefit if the first-to-move donates considerably less than what the second-to-move would have otherwise donated.

You might be thinking ? So what — the charity now otherwise has money it didn’t have prior — net win, game over. Evidently, yes — you’re right — there is a benefit to the charity in the short-term but the negative effect to the business can affect its long term donation strategy as the reactionary model can provide a disincentive to donate at all. This can result in non-donations if a nash equilibrium is reached — that is, each player knows all of the others players moves and changes in strategy’s such that no player wins. Of course, the primary assumption is that the business wants a net benefit — an argument correlated to shareholder responsibility, profitability and countless other factors — but primarily one which is answered, again, in the affirmative. In this regard and perhaps most importantly in respect to disincentive effects of the donation process, most corporate donation scenarios result in a pareto optimilaity situation such that one company will always be better off and one will always be worst off which can often lead to non-donations. Imagine, first-to-move Company A donates $1,000 and is a hugely profitable enterprise while second-to-move Company B donates $10,000 and is only small — the net benefit to B greatly outweighs that of A leading to A to question it’s donation strategy or being forced to donate more in response — again, a win to the Charity in the short-term but a potentially negative long term affect due to the circumstantial outcome to Company A. To put this in perspective, many of you may be familiar with the age old Prisoners Dilemma question:

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated the prisoners, visit each of them to offer the same deal. If one testifies for the prosecution against the other (defects) and the other remains silent (cooperates), the defector goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

There are 4 outcomes — both silent for 6 months, A silent/B speaks — A 10 years/B free, B silent /A speaks — B 10 years/A free, A speaks/B speaks — 5 years. Evidently, the zero-sum-game presented is that neither should speak — but of course human nature is to question the strategy of the other and conclude that both are better off to speak than be silent since both are worse off if only one speaks. Such a scenario can easily be extrapolated to Company A and B above such that donations tend to be optimal if companies seek to act in equilibrium in donating — both potentially achieving net benefits without damaging the other while still positively benefiting the charity.

Of course, the common denominator in all this is the attribution to the economic value of the gift being provided and the analysis of game theory to donations. Evidently, if everyone were to follow the notion of altruism and duty then none of these such problems would occur. Indeed, while there is no doubt that large charities are needed and I donate to them — I truly do prefer the concept of Pay It Forward which is a merging of the two primary concepts mentioned above. For those that have not seen the movie of pay it forward — it is essentially a notion of altruistic signalling. That is, one temporarily reduces their value by increasing another’s with the expectation that the other will act in a similar way at some point in the future to a separate person again — this absolutely ensures that the flow of fitness travels directly from the one individual to the another. The notion of value is no way limited and can be simply measured in time or by purely economic means. Benjamin Franklin adequately framed such a notion in 1784

When you […] meet with another honest Man in similar Distress, you must pay me by lending this Sum to him; enjoining him to discharge the Debt by a like operation, when he shall be able, and shall meet with another opportunity. I hope it may thus go thro’ many hands, before it meets with a Knave that will stop its Progress. This is a trick of mine for doing a deal of good with a little money.

Of course, there are two fundamental flaws in the pay it forward model such that firstly, there must be a large and indefinite number of opportunities which exist regardless of form — and secondly, there will be those that simply do not pay it forward. I would argue that the first is not a large problem since there really are an indefinite number of problems to solve in the world while the second is highly correlated to duty. The primary reason I like the pay it forward model is that it is effective and morally gratifying — you perform a task directly for someone, and they in turn can provide a benefit to someone else. A simple example is purchasing a coffee for the person behind you and leaving a pay it forward note on the counter — the social morality and duty of the concept then falls into their hands — a moral obligation then associated to karma and the seemingly moral psychological and ‘karmic’ risk of not performing the act.

In conclusion, while this post seemingly has meddled together a number of different concepts — I think both options have their place. Large charitable organisations dispense to those who can otherwise not be reached and attack fundamental social fabric problems at a broader scale — while the pay it forward model is a direct model that provides immediate results to the donee. If more people chose to pay it forward, then I have no doubt that many more people would begin to donate to a greater number of charities purely from being a recipient of an act of random kindness for no apparent reason. It really is entirely uplifting to both grant and receive a gift — no matter how insignificant — from a total stranger. Try it yourself.