Giving Compass' Take:

• This GiveWell post explores the importance of influence (or leverage) in the field of Effective Atruism and how its approach has evolved over the years.

• GiveWell's current method is to calculate a cost-effectiveness ratio that only focuses on the costs to a charity, thus showing more efficiency. Is this a smart way to go about maximizing impact?

• This gives an overview of Effective Altruism in action, but there are some complications.

Many charities aim to influence how others (other donors, governments, or the private sector) allocate their funds. We call this influence on others “leverage.” Expenditure on a program can also crowd out funding that would otherwise have come from other sources. We call this “funging” (from “fungibility”).

In GiveWell’s early years, we didn’t account for leverage in our cost-effectiveness analysis; we counted all costs of an intervention equally, no matter who paid for them. For example, for the Schistosomiasis Control Initiative (SCI), a charity that treats intestinal parasites (deworming), we counted both drug and delivery costs, even when the drugs were donated. We did this because we felt it was the simplest approach, least prone to significant error or manipulation.

Over the last few years, our approach has evolved, and we made some adjustments for leverage and funging to our cost-effectiveness analyses where we felt they were clearly warranted.

Consider this exercise. Suppose a charity pays $5,000 to purchase magic pills. This would cause (with 100% certainty) the government to spend another $5,000 distributing those pills. The pill distribution saves 1,000 lives in total. If the government didn’t fund the pill distribution, it would have spent $5,000 on something that would have saved 250 lives.

How should a philanthropist think about the cost-effectiveness of this charity?

  • One option is to include all costs to all actors on the cost side of the cost-effectiveness ratio. Total costs are $10,000 to save 1,000 lives and cost-effectiveness is $10 / life saved. This was GiveWell’s approach in 2011.
  • Another option is to discount government costs by 50%, because the government would otherwise have spent the funds on something 50% as effective. So total costs are $5,000 + (50% x $5,000) = $7,500. 1,000 lives are saved and cost-effectiveness is $7.50 / life saved. This was GiveWell’s approach from 2014 through 2016.
  • A third option is to include only the costs to the charity on the ‘cost’ side. The charity causes the magic pill distribution to happen, saving 1,000 lives. But it also causes the government to spend $5,000, which otherwise would have been used to save 250 lives. So the total costs are $5,000, and 1,000 – 250 = 750 lives are saved. Cost-effectiveness is $6.66 / life saved. This is GiveWell’s approach now.

We believe the third way of treating leverage best reflects the true counterfactual impact of a charity’s activities. It also makes charities that are leveraging other funders look substantially more cost-effective than we previously thought.

Read the full article about revisiting leverage in impact philanthropy by James Snowden at GiveWell.