Sunday, December 12, 2010

The Inefficiency of Cost-Benefit Analysis

I've been learning a lot about social impact measurement and metrics recently, and I've realized something: I don't care about cost-benefit analyses.

My economics professors would be so disappointed in me, I know. But it's true. Out of all the different methods for deciding why to donate to a certain nonprofit, or for why an organization should pursue a particular program, I think a cost-benefit analysis is the least effective way to determine what to do.

I'm not in charge of a large foundation (yet!), so I can't speak much to the different justifications for funding a particular nonprofit, or a particular program. But I do try to be informed and intentional about my charitable donations, so I can (try to) speak to the justifications behind individual donations.

The organization I decided to support is the Village Enterprise Fund. I did not make this decision based on any sort of cost-benefit ratio. That is, I did not look at where my money would, in a strict numbers and results sense, make the most difference, but rather, where I thought the most important work was being done. I care about opportunity access, and I determined that VEF--which provides start-up business grants to entrepreneurs in East Africa--was the most effective organization working on this issue.

If I was strictly looking at a cost-benefit ratio, I would have given to Village Reach, GiveWell's top-rated charity, which has an "excellent" cost-effectiveness rating. GiveWell says that Village Reach, which strengthens health systems infrastructure in rural areas of developing countries, averts a child's death for ever $545 it spends. By contrast, VEF, while still recommended by GiveWell as a charity to donate to, has only a "moderate" cost-effectiveness rating, the lowest of all the top-recommended charities.

I'm not trying to claim that giving to VEF over Village Reach is inherently better because economic empowerment is more important than health infrastructure, but that is a personal conclusion I've made. I've made that decision mostly for emotional reasons that most others probably don't share with me. And because of that decision, I am comfortable knowing that my money is not going as far as it could if I gave it to another organization.

I am very uncomfortable saying that one problem is more important to fix than another, and I don't think cost-effectiveness measurements claiming that one program is more cost-effective than other changes my opinion about that. It does get tricky to support this position when I consider that we have limited resources, and we want to maximize the most good with what we have, but I am comfortable living with that conflict, for now.

I think the reason I am drawn to the nonprofit sector is because a nonprofit's bottom line is not based on a cost ratio, but on its mission. All problems need solutions, no matter how much money it takes. Improving the lives of the poor in the US is as important as improving the lives of the poor abroad, it just takes different resources and different solutions. Because nonprofit work is about more than money, looking at a monetary bottom-line to determine where we should contribute our own resources will always miss out on something. And missing something is always inefficient.

Disclaimer: The postings on this site are my own and do not represent the positions, strategies or opinions of Venture Philanthropy Partners


  1. Absolutely. There are many things that can't be expressed in a spreadsheet: Joy. Peace. Kindness.

  2. "Out of ALL the different methods for deciding why to donate to a certain nonprofit, or for why an organization should pursue a particular program, I think a cost-benefit analysis is the LEAST effective way to determine what to do. " (emphasis mine)

    I think having a monkey throw darts at a board of potential decisions would be less effective than a cost-benefit analysis. Or, say, hiring Jafar to be your humanitarian investment consultant.

  3. Thank you, Harry, for your constructive criticism. It is not the first time I've been accused of puffery, nor will it be the last.

    I think I have an editor position opening up for the blog, if you are interested.