Donor lotteries: demonstration and FAQ

By CarlShulman @ 2016-12-07T13:07 (+42)

Suppose that Alice is trying to figure out how to do the most good with her donation of $1,000 this giving season, and can spend various kinds of resources to improve her decision. Unfortunately, many investments that could improve the decision quality would impose costs that are large relative to her donation: spending hundreds of hours (whether her own, those of charity staff, or of hired evaluators) investigating opportunities will cost more than her donation amount. She will also be limited in the projects she can fund: whereas a large funder can attract proposals for new projects, and fund a new position or startup organization, she seems to be limited to contributing to existing public opportunities.

One solution to this problem would be for Alice to work with Bob, a large donor, to construct a 'donor lottery.' Alice donates her $1,000 to Bob's donor-advised fund, or DAF. Then Alice and Bob consult a random number generator to determine how to recommend donation allocations to the DAF. For example, they might plan that with 1/100 probability Alice would get to recommend the allocation of $100,000 from the DAF, while with 99/100 probability Bob allocates the DAF without input from Alice.

In the event Alice 'wins' the donor lottery, then she can pursue a number of costly options to improve her decision quality, offset against a 100x larger donation, while the rest of the time she can avoid research costs. Effectively, the donor lottery cuts her research costs by 99% while opening up additional opportunities. If $100,000 is not enough for some opportunities (e.g. if $1,000,000 is needed to fund a new startup organization) she could repeat the process with still-larger donor Carol.

I have previously proposed that small EA donors who wish to capture economies of scale consider this method. On the whole, I think that it would be better for many donors giving less than $100,000 per annum to use donor lotteries to consolidate into a smaller number of medium-large donors and capture economies of scale.

However, insofar as significant effort is required to access a donor lottery (which must be made regardless of the outcome), and it represents a novel untried method, it becomes less attractive. This post announces a concrete implementation of the donor lottery concept, thanks to effective altruist Paul Christiano, who has agreed to back it with his DAF account at Vanguard Charitable, and the first use cases, in hopes of working out bugs and establishing a precedent for others.

The remainder of the post will cover frequently asked questions and implementation details for other effective altruists who may wish to use or provide donor lotteries.

Donor lottery announcement

[ETA: finalized pre-draw details are in Paul Christiano's January 11th (GMT) post. The draw for this first lottery has now been completed, with Tim-Telleen Lawton winning, although there will be other future lotteries, hopefully with multiple providers.]

The donor lottery will be randomized using the first 10 hexadecimal digits of the NIST public randomness beacon output, with the result at 12:00 pm PST, January 15, 2017. This will provide plenty of time for people to contribute in either the 2016 or 2017 tax year (tax deductions apply for the year of donation to the DAF).

Participants will transfer funds to Paul Christiano's DAF prior to the draw, with each $1,000 purchasing 1% of the possible values of the randomness beacon. If one of a contributor's numbers are drawn Paul intends to recommend allocation of $99,000 from his DAF at the winner's direction to qualifying nonprofits. The difference from $100,000, a 1% 'haircut,' would be recommended by Paul to a charity of his choice as compensation for offering the lottery from his charitable funds.

However, as is generally the case with DAFs, and in similar structures such as the Long Now Foundation's Long Bets, Vanguard Charitable is legally free not to follow Paul's recommendation (although such a case would be quite exceptional), and no binding contract exists. The participants thus far are familiar with Paul and one another in many cases, and the lottery relies on the honor system and the implausibility of accepting the reputational costs of visible failure to follow through on a public commitment in order to recommend different charities to the DAF. 

The DAF has a minimum contribution size of $5,000, so those donating less than that will be coordinating to donate in groups, but with numbers assigned separately. [ETA: donations under $5,000 can now be accepted through donation swapping with Paul, no pooling necessary.]

[ETA: per Paul's follow-up post, the draw numbers have been rescaled to ensure a first-round winner (for the total donated to the lottery), with the winner then having the choice of placing a second bet to reach $100k]

[ETA: added Howie Lempel December 7th, 2016; Rebecca Raible and Pablo Stafforini December 12th; Aaron Gertler December 16th; Brayden McLean and Benjamin Hoffman December 24th; Catherine Olsson Dec. 26th; Eric Herboso and Ian David Moss Dec. 31st; Glenn Willen Jan. 2; Jacob Steinhardt Jan. 4th; Brandon Reinhart Jan 8th.] 

Others who wish to participate, please contact Paul F Christiano (at firstnamemiddleinitiallastname at gmail) for details regarding funds transfer to Vanguard Charitable, etc.

I would also hope that these early adopters might inspire other donor lotteries, both other providers and users. 

Q: Step-by-step, how do I make use of a donor lottery as a small donor?

A:


[ETA: one lesson from the first lottery was that the minimum donation size for DAF contribution was a hassle, and donation swapping (donation to a charity the lottery sponsor was otherwise donating to, so they can reduce their donation to it accordingly and recommend channeling the funds to the winner's recommendation) was more efficient.]

1. Find a larger donor with a DAF willing to provide a donor lottery, such as Paul Christiano.
2. Determine the donation amount you would like a chance at, and agree to terms, e.g. "I donate $1,000 to this DAF in exchange for a 1% chance at allocating $99,000 from it."
3. Jointly announce the terms, and the public randomness source that will be used to determine the outcome, e.g. the NIST beacon, as discussed below.
4. Ensure copies of the announcement are secured, e.g. by tweeting a hash of the post.
5. Donate to the DAF.
6. The public randomness source provides its result.
7. If you 'won' the randomization, take steps to gather information or pursue donation opportunities that make sense as a large donor.
1. Post about your decision-making process and invite feedback and information about key points.
2. Talk to charities and experts who can afford to spend more time advising you on the larger donation.
3. Call for proposals, or request them from particular organizations and experts, for 'chunky' grants or projjects with minimum scale.
4. Spend more time thinking about and studying the options.
5. Hire research support, auditors, and other means of evaluation. 
8. Make your recommendations to the DAF.
9. Your large donations go through.

 
Q: This idea seems novel. Is there an established precedent?

A: The Long Now Foundation has operated a closely related service, Long Bets, since 2002. This allows two people to make bets on future events, with the stakes going to the winner's charity of choice. The Long Bets rules page states:

There is no maximum amount. The bet money, treated as a donation to the The Long Now Foundation, must be paid at the time the Bet is made, and is tax-deductible immediately...

The charity designated should be IRS-approved if in the US. Foreign charities also are eligible. The Long Now Foundation cannot legally guarantee that the winnings will go to the winner's preferred charity. It is highly motivated to do so, of course, since how a bet is resolved is in the public eye.

This provides an established precedent of donations conditioned on uncertain events. Like this, and like DAFs, a donor lottery would not involve a legally binding contract, but such mechanisms can be quite reliable in practice.

Q: How can I be confident that the large donation will be forthcoming if I 'win'?

A: The terms of the donor lottery can be announced publicly, committing the backing of reputation. Money donated to a DAF can only be passed on to legally recognized charities. Using a trusted donor's DAF, and one for whom the amount is relatively small (so that reputation matters more) would also provide additional assurances. The announcements should be copied to secure and unchangeable public storage (some participants in this lottery will be tweeting hashes).

Ultimately, however, this setup relies on the honor system and reputation.
 

Q: Where can we find a trusted public random number generator?

A: The National Institute Standards and Technology in the United States offers a public randomness beacon, which "generates full-entropy bit-strings and posts them in blocks of 512 bits every 60 seconds. Each such value is sequence-numbered, time-stamped and signed, and includes the hash of the previous value to chain the sequence of values together and prevent even the source to retroactively change an output package without being detected."

To randomize, the parties can publicly state a particular minute (e.g. 5:04 pm, December 8th, 2016) for the determining output value. Then one can take the first 10 hexadecimal digits (which can show numbers from 0 to 1,099,511,627,775) and use them to cash out a probability. For example, a 1% chance could be implemented as "the first 10 digits lie in the range from 0 to 10,995,116,116,278."

Other sources, from weather to market movements, are abundant.

Q: If I believe I would do more good per dollar with a smaller chance of a larger donation, why not just gamble or make risky investments?

A: In principle, as discussed in my blog posts on donor lotteries, these methods could also be used by small donors to take advantage of economies of scale in expectation. The advantage of the donor lottery via DAF is just in reducing overhead and transaction costs.

Q: Does it matter what other donor lottery participants would do with their funds?

A: Suppose you are one of 10 people each contribute $10,000 to a pool, and one randomly gets to allocate all $100,000. Should you care what charities the other participants would recommend? On average, you are not transferring any net dollars to the charities recommended by the other participants (90% of the time you pay out $10,000 to one of those charities, and 10% of the time $90,000 gets directed to your preference instead). However, the reason to participate in the first place would be if marginal returns to donations to a charity vary with the amount, and donors hope they are increasing.

If other donors would support charities which one thought were actively bad (even with the chance to think more carefully in cases where they 'win' the donor lottery), and do so more effectively per dollar with larger donations, then one could do harm by helping harmful donations.

For charities with positive or neutral effects, the worry would be that participants are mistaken about increasing returns to donation size. For example, a donor who gives $10,000 to an organization with a budget of $50,000 might well expect that the organization would much prefer $10,000 with certainty over a 10% chance of $100,000. Such diminishing returns can give reason for risk-aversion. If one is focused on a small cause or organization, where diminishing returns matter over small ranges, this is reason to worry about the chance of the area facing a financial shortfall due to chance lottery outcomes. One way to address that is by conducting a lottery among supporters.

Q: How can the lottery provider offset the risk their DAF takes?

A: While for donation amounts that are small relative to funding for one's causes, there is a good case for altruists being approximately risk-neutral (e.g. for small donors), diminishing returns mean that for large pools of money there is some cost to taking on risk for donors who are large relative to the causes they work on. So a lottery provider could arrange a 'haircut,' e.g. Alice donates $1,000 to Bob's DAF, and with 1% probability gets to allocate $99,000, rather than $100,000. The difference serves to compensate for the risk that Bob's DAF will be depleted of cash to fund charitable opportunities he prioritizes.

The optimal 'haircut' would vary depending on alignment between Alice and Bob, Bob's bankroll, diminishing returns in the causes Bob supports (relative to the size of his donations), etc.

Q: How large an amount should I consider using a lottery to reach? Does this imply all EA donations should be merged?

A: There are both helpful economies of scale and harmful diseconomies of scale. For example, if all effective altruist donations were consolidated in a single giant foundation, then they would all be at risk of mishap together, e.g. if a catastrophe befell it. If one donation risked attracting controversy or straining management bottlenecks for the whole pool, the cost would be much greater than for several smaller pools. A single pool would also suffer from reduced diversity of approaches, and could miss out on local knowledge of particular opportunities (which should give donors reason to think that they have diminishing returns to larger donations, not increasing returns).

A donor lottery executed through a DAF also requires that donations go to registered charities, excluding such things as political contributions and informal help to particular individuals (the latter being a case where local knowledge is especially important).

I would suggest that small donors consider using lotteries to move into the range of $50,000-$500,000. This is most attractive if one would otherwise be donating to organizations or areas where one's funds are small relative to total funding, and fungible with other donors, but have hope of identifying or creating better opportunities as a larger donor. It is least attractive when one one would otherwise be a large component of a small funding pool, especially exploiting local knowledge, so that one expects diminishing returns over the relevant range.

Additional lottery stages to reach quantities in the millions or more face high risk of missing low-hanging fruit and suffering from diminishing returns. However, they might make sense in some circumstances if one expects strong neglected opportunities in the creation of new organizations or other foundation-like grants.

Q: What if my target donation amount is too low or high for a known donor lottery?

A: For the smallest donations, e.g. $10 or $100, I would suggest an informal randomization with a friend to start. If that randomization delivers a larger donation, then it could be funneled through a more substantial donor lottery.

If a friend is donating to a charity with budget that is large relative to their donation (e.g. GiveDirectly or AMF) they can easily offer a simple honor system donor lottery without much worry about diminishing returns.

If you would like to have a chance at a quite large donation, e.g. millions of dollars, I would recommend a multi-stage process. First reach a donation total in the hundreds of thousands, either directly or via a donor lottery. At that point, try to be connected with much larger donors 

Q: What if I want to delay my donation over time after winning?

A: Some of the opportunities for improved decision-making as a larger donor take time. If funds will be sitting in the DAF for some time, compounding due to investment returns, you may want to make an arrangement with the donor providing the lottery as to the treatment of investment returns, e.g. the stakes growing in line with returns for the DAF as a whole.

Q: Are there any interesting alternatives to a random number generator?

A: Instead of using the results of a public random number generator, one could instead 'bet' (in the style of Long Bets, but with less of a haircut) on predictions that are relevant to charitable allocation, or the relative predictive skill of the parties. For instance, a payout might occur conditional on a particular election result, or scientific benchmark. This could be used to insure against special needs (e.g. perhaps you care more about donations if certain technologies are developed, or if certain problems become more severe), and to make it more likely that better decision-makers allocate the donations.

Q: Why not instead allocate the donations of a group of small donors using randomization?

A: Another way to capture some of these benefits is to team up with a few friends donating on the same scale, and use randomization (weighted by donation amount) to pick one of you to allocate the donations of the group (using the honor system). It may be significantly more difficult to buy chances of large donations, but this is a useful alternative.

Q:  Won't donor lotteries reduce the amount of practice people get thinking about charity?

A: Thinking carefully about one's donations can be a helpful educational exercise, and build important skills for a would-be effective altruist, as well as participate in various social processes. Giving Games let people allocate money as a way to increase their interest in donating effectively and in investigating their options. This may be a reason not to allocate one's entire donation budget to a lottery, and to donate a smaller amount to one's best guess, for practice, while other funds go into a lottery for higher expected quality.

If the indirect benefits such as practice and signaling are sufficiently great, and economies of scale sufficiently low, this could be a reason to avoid donor lotteries entirely.

Q:  My question isn't answered above, or I would like to participate in matchmaking for a donor lottery.

A: Please contact Paul F Christiano (at firstnamemiddleinitiallastname at gmail) or myself (at firstnamelastname at gmail). Public discussions in the comments are also helpful.