Does it make sense for EA’s to be more risk-seeking in earning to give?

By Joey 🔸 @ 2022-05-20T15:29 (+63)

Repost from Charity Entrepreneurship's blog

Historically it has been argued that EAs who are looking to make large donations may have more reasons to be risk-neutral than people who are aiming to make money for personal, happiness-focused reasons. This is in part due to the impact of donations not suffering the same diminishing returns as money on happiness. However, we believe there is an additional, significant reason for people who are doing E2G (earning to give) to be even more sympathetic to risk. In short; as income goes up, a larger percentage of the income is donated. This leads to dichotomized earning outcomes and a higher net donation per dollar.

Theoretical example: 

Say we have ten EAs, each of whom can do E2G in a low-risk way (e.g. working in software) or a high-risk way (e.g. founding a software startup). In both cases, they all have signed the GWWC pledge and plan to donate 10%+ to an effective charity.

Low-risk outcome: 
In the low-risk scenario, each does E2G and earns $100k, donating 10%. Across the group this results in $10k x 10 people = $100k donations. This is a really great outcome, but let's look at the higher risk situation with the same expected income value ($1,000,000).

Higher variance scenario:

In this situation, nine out of ten people have startups that do not work that well, resulting in a yearly income of $50k. However, one person earns considerably more; $550k. Most of the lower earners stick with their donation percentage, with eight continuing to give 10% and one no longer giving. This results in $40k of donations. However; the earner of $550k feels 10% seems a little underwhelming relative to their newfound wealth, and instead donates 50%. This results in $315k being donated to charities out of the same $1,000,000 earned by the high-risk group.

Although the financial earnings in these two groups were identical, the donation outcomes differed by more than 3 times ($100k vs $315k). The higher variance scenario did considerably more good. 

Real-world data: 

This is a theoretical example with made-up numbers. How do we know that people who earn more will, in fact, donate more? Thankfully we have some data on this topic from both within the EA movement and outside of it. Inside the EA movement, we have compelling data showing this trend happens both in GWWC and non-GWWC members; this is likely the most relevant data when thinking about giving EA career advice. However, outside of the EA world there is also some confused data that tentatively points in the same direction. 

Countervailing factors:

There are some other factors that can affect this calculation pretty significantly. If half of the ten low-risk EAs have donation matching at their workplace, that increases their net donations pretty significantly (x1.5), although still not enough to change the endline outcome. Also, if you assume that every EA fundraises a bit from people in their same income group it gets even less clear. 

On the other hand, a big, beneficial factor of dichotomous income is that it opens up more optimal career change paths. In the low-risk situation, any one of those people changing careers affects the net donations by 10%, however, in the higher variance scenario, nine of the ten people could change careers while only affecting 1.5% of the total donations made. Of course, the cost for the highest income person becomes a lot higher, but assuming the people are of roughly equal talent at the start, having differentiated outcomes allows easier career changes with less percentage of donations lost. Those who manage to launch a successful start-up business are also less likely to change careers in general. Another positive is that in our experience, for-profit entrepreneurship typically builds better skill sets than many other E2G paths. 

On the basis of this reasoning and evidence, we feel more attention should be aimed at encouraging E2Gs to aim towards higher risk career paths, such as for-profit entrepreneurship.