Does a $100 Million Donation Make a Difference?

| October 15, 2017

The stories sound impressive.

News reports indicate San Francisco is getting a $100 million donation to reduce homelessness. Facebook CEO Mark Zuckerberg donated $100 million to the Newark, NJ. school system. Los Angeles declared a public emergency and plans to spend $100 million to take steps to help combat homelessness. The philanthropy of eBay founder Pierre Omidyar will contribute $100 million to support investigative journalism, fight misinformation, and counteract hate speech around the world.

It’s a magic number, that $100 million. It’s so far beyond the range of most anyone’s individual financial status that it seems like it’s more than enough to cure whatever social issue it is attempting to address, be it homelessness, bad schools, or misinformation.

It’s actually a quite common thing, too. Just Google “$100 million donation” and more than 10,000 results pop up, all touting ways that the huge amount of funding will be used to battle whatever ills its recipients suffer.

Yet, donations of $100 million – or even a billion or trillion – will only help some people, and surprisingly fewer than the enormous sum would indicate. The bigger issue is whether those being helped are the people employed by the bureaucracies administering the windfall or the actual victims and issues the money intends to address.

We’re not accusing anyone of mismanagement or bad intentions. Some individuals and organizations truly believe that throwing money at a problem will solve even the most intractable issue. In the nonprofit and charity worlds – or, for that matter, in the private sector – resources are always welcome, and the guilt associated with vast sums of money motivates those fortunate enough to have achieved substantial means to spend it for the greater good.

Yes, there is mismanagement in some instances, but some problems are simply beyond the ability of any amount of money to eradicate. Unlike polio, human nature is not a disease that can be killed by the right combination of drugs.

Sometimes, the magic $100 million figure causes more harm than good. That’s because of the phenomenon known as prospect theory. Let’s examine the issue.

PROSPECT THEORY

Normal models of behavior indicate that most people believe that every human life should be equally valuable. But prospect theory argues that’s not the case – a larger tragedy can overshadow the smaller one, thereby diminishing the urgency of addressing the smaller tragedy. It’s been called the most important descriptive theoretical framework in the field of decision-making.

A hypothetical that’s commonly used to describe the theory poses a problem: you learn that one person is dying and could be saved by a donation to a humanitarian organization. But then you learn that 87 others are at similar risk. Under this hypothesis, your donation will only go to the one person you originally thought was dying. Even though it’s the same person, prospect theory argues that donations will be greater in the first case (when you thought it was just the individual) than the second. Why?  Because such feelings as empathy, sympathy, sadness, and compassion – the essential ingredients for helping – are more readily given to the individual rather than the cause.

In essence, that means that small, focused situations are more likely to motivate donations and thus create an impact than the spray-gun approach of larger donations.

Let’s examine one instance of how these $100 million plans can go wrong. Of course, every case is different, but all seem to suffer from the same basic problem – money is siphoned by bureaucrats, some is misspent on Quixotic quests, and others simply target the wrong issues.

ZUCK’S FOLLY

In 2010, Mark Zuckerberg, perhaps with an eye on a future political run, decided to donate $100 million to the failing Newark, NJ school system. The plan set an ambitious five-year turnaround for the schools, which were so terrible they were being managed by the state at the time.

“It sounded to me at the time like, well, that’s enough money to do anything,” said Dale Russakoff, talking to Business Insider about her book, The Prize: Who’s in Charge of America’s Schools, that chronicled the effort.  “I didn’t think it was going to be the miracle that they talked about. But I thought that it was going to be noticeable, positive change in education in a city that had been so neglected by history.”

Russakoff, like others, assumed that large amounts of increased funding would yield positive results. She was proven wrong.

Zuckerberg pledged $100 million, but the amount available grew to $200 million thanks to matching donations.

The money was spent this way (note that it’s not quite $200 million).

– Labor and contract costs: $89.2 million
– Charter schools: $57.6 million
– Consultants: $21 million
– Various local initiatives: $24.6 million

There are many reasons the plan failed, most having to do with entrenched bureaucracy, neighborhood resistance to forced school changes, and plain old back-scratching by “consultants” hired to provide hot air. But note that most of the $100 million was spent on nebulous things that had little impact on the actual students. Only the charter schools helped move the needle in pursuit of excellence, and there were other issues created by bureaucrats in Newark that limited even that minor good work.

The bottom-line is that all the money in the world couldn’t solve the problem. Newark schools are still terrible.

DON’T GIVE UP

So how can you make a difference if $100 million can’t? Go back to the prospect theory. Focus on actual results and ask: will all the money in the world rid us of homelessness? Instead, think small: $100 may be used by a local food bank for some neighbors or provide a healthcare clinic with enough funding to stay open an extra hour. These are measurable, tangible impacts on a community that are done with far less. This is just one example of positive contributions that don’t require lots of money.

The key to any investment is knowledge. As much as time permits, develop a relationship with a key charity in your neighborhood. Cut through the rhetoric and ask to see its financials. If a large amount of money is used to support the bureaucracy of the organization, it will tell you that the real beneficiaries are those who are employed by the organization.

There are giving guides available on many web sites. It will take some research and some soul-searching, but clearly the lesson of how to make an impact is greatest when tangible goods and services are provided directly and on a local level.  Focus on your neighborhood, keep on top of the results, and you’ll be making the smart choice with your money.