Efficient Markets in Philanthropy

In response to my post yesterday in which I discussed the value of information to philanthropy and why donors should desire efficient philanthropic markets, Phil Cubeta writes:

The logic here can become relentless and destructive. What this tends towards a lists, like league tables in a sport, with the best at the top. It leads then to managing a nonprofit by the numbers, to get the rating, and it leads to shutting down those that don’t rank high. We then have the tyranny of the metrics, however much arbitrariness is built into them…

The world you want – are you sitting in corner office reading a spreadsheet?

So are the philanthropic capital markets I envision boring and lifeless with endless spreadsheets and numbers to crunch? Not in the least.

Economics is often called the “dismal science”. I know that many people think that finance is boring. But the vision of financial markets as nothing but numbers and spreadsheets does not capture the reality. Do investors buy stock in Apple because they spent hours and hours processing spreadsheet calculations? No. While at the end of the day, buyers of Apple stock believe that the return on capital being generated by the company will make for a profitable investment, the information they use to determine that are not just numbers. The way in which Apple has captured the imagination of the consumer, (an intangible piece of data that cannot be added to a spreadsheet) is by far the most valuable asset that Apple has and it is a major reason why investors have flocked to the stock.

Have you ever watched CNBC, the news channel of the financial markets? It is far from some kind of spreadsheet crunching lecture. Every day, investors or all types come on the show and make passionate arguments for why certain companies are good investments. While numbers and calculations underlie much of their thinking, it is the story, the human story of the companies they discuss that take center stage.

Warren Buffet is widely considered the best for-profit investor of his generation. Does he sit in a corner office reading a spreadsheet the way that Phil suggests? The quote below is from noted investor Whitney Tilson (Tilson is a huge fan of Buffet and a fellow columnist of mine at the Financial Times):

If the future were predictable with any degree of precision, then valuation would be easy. But the future is inherently unpredictable, so valuation is hard — and it’s ambiguous. Good thinking about valuation is less about plugging numbers into a spreadsheet than weighing many competing factors and determining probabilities. It’s neither art nor science — it’s roughly equal amounts of both.

The lack of precision around valuation makes a lot of people uncomfortable. To deal with this discomfort, some people wrap themselves in the security blanket of complex discounted cash flow analyses. My view of these things is best summarized by this brief exchange at the 1996 Berkshire Hathaway annual meeting:

Charlie Munger (Berkshire Hathaway’s vice chairman) said, “Warren talks about these discounted cash flows. I’ve never seen him do one.”

“It’s true,” replied Buffett. “If (the value of a company) doesn’t just scream out at you, it’s too close.”

Taking liberties with Tilson’s quote, I would argue that donors should not “wrap themselves in the security blanket of metrics” because “the lack of precision around measuring the impact that nonprofits achieve makes them uncomfortable.”

World-class investors do not sit in their office crunching spreadsheets all day. Neither should world-class donors. But the underlying logic of both should be that of achieving the highest return on investment.

Recently Phil commented to Perla Ni regarding her site Great Nonprofits (which offers reviews of nonprofits written by volunteers, donors and the people served by the nonprofit):

Thank you so much, Perla, for setting the record straight. In fact, your site is the exact opposite of a metrics driven exercise. You are bringing together the voices of those who have been touched by a nonprofit. I finally “got” what you are doing.

An efficient philanthropic capital market does not only view numbers as valuable inputs to the decision making process. Sites like Great Nonprofits offer extremely valuable information to donors. This sort of qualitative information is critical to both donors and for-profit investors. Great Nonprofits is not the opposite of a metrics driven exercise. They are both part of the same process of determining where donors and investors should direct their capital.

Disclaimer: Nothing in this blog should be construed as investment, tax or legal advice. This blog is for informational use only.


  1. phil says:

    Do you think, Sean, at all about civics, citizenship, about the nonprofit sector as “soul making,” or about how we as a people learn the difficult art of democracy? Perhaps messing about in the nonprofit sector, forming clubs, starting organizations, achieving little, trying again, working your way up through the chairs of some organization, all that is part of how we grow into the role of active citizens. To see giving as investing leaves out the whole concept of good deeds and civic engagement and the independent sector as the seedbed for democracy. I am afraid that unless we make a conscious effort to revive that language, we will see the independent sector swallowed up in bidnis. And that would be a great loss. Most of all for those in bidnis who would lose the opportunity to become something more.

  2. young staffer says:

    I don’t disagree with either of you, but I don’t see that’s an either/or. The role of nonprofits and philanthropy in society is not fully captured by either of the ideals you expressed. The independent sector is a place where the fruits of our capitalism and the hopes of our democracy rub up against one another. Notions of efficiency, drawn from capitalism, and those of equality, drawn from democracy, both have a role. And – as both economics and politics frequently remind us – efficiency and equality often (certainly not always, but often) rub up against each other.

    But when did it become a choice for the sector between most efficiently solving problems and nurturing the higher callings of our community? It seems to me that at its root philanthropy and the nonprofit sector can never be just one or the other. Every decision to give time or money has multiple layers: there is first a decision to give at all – a community impulse, a decision to give to a particular cause and theory of change – a “political” impulse, then a decision to give to a particular organization – an economic impulse.

    In the seeking of the efficient market Sean describes, the desire to give back (which is at the root of all us this) and the disagreements about values (which include those expressed by how we measure outcomes and which we give weight to) will not disappear. This is, after all, a sector that includes both comprehensive sex education and abstinence-only sex education outfits. No assessment of effectiveness or efficiency of management will sway the most ardent proponents on either side that their organization should not exist and that their different visions of the ideal community are wrong. The disagreement is too deep.

    Yet each side, I imagine, wants to see the creation and growth of the best organizations possible for advancing their values and realizing their vision. Efficient capital markets would seed innovative new approaches and support established successes on both sides of the divide in service of their vision. Philanthropic decisions are not ever going to be simple; I can’t imagine that the sector’s pluralism will go away even if its expression becomes more efficient.

    This discussion seems to me to pit two histories of the independent sector against each other – the early 20th century philanthropy of Carnegie and Rockefeller and Ford against the 19th century of de Toqueville’s associations. We shouldn’t (nor do I think we can) do away with either legacy. Both are part of the nonprofit sector and both color it. The paradox is that they have contradictory aims. The first, the one which would benefit from an efficient market, see its own destruction as its ultimate end. The second, which rests on civic engagement, sees its own expansion as almost endlessly beneficial.

    Ultimately, though, I believe we can only mitigate social ills by building community values. When we make this into an argument between the two, we do a disservice to the value of both historical legacies and we miss the sector’s unique opportunity to express the best of our democracy and the best of capitalism. You can’t rub the contradictions out; you just have to adapt to them.

  3. Michael Moody says:

    If the conclusion we arrive at here–and I think the “young staffer” comment above arrives at this conclusion eloquently–is that there is a place for quantitative metric-based evaluation and qualitative (to use a word from the original post) “imagination”-based evaluation, then I think this is a very useful discussion.

    We need to recognize, first, that neither of these approaches is going to go away. Those who wish the latter would go away in favor of efficiency measures alone have a tough row to hoe if we consider what we know about why people say they give (e.g., because they were asked by friends, because of trust in the organization, because of a desire to give back, etc.).

    So this leads, then, to the question of whether the two approaches can co-exist, and whether they can complement each other to the benefit of donors. The qualitative folks need to become comfortable with the numbers (they really have no choice in the nonprofit world today, frankly–and this is probably a good thing in the end, though there are growing pains!). And the metrics folks need to be comfortable with retaining some of those other forms of valuation (e.g., people recommending trusted nonprofits to each other, people giving because they are committed to a mission) that have been around, for good reason, for a long, long time. The key to this last point is for metrics folks to recognize that non-quantitative forms of evaluation CAN be systematic and rigorous in many cases.

    Put another way, if more and better information is the key to more and better giving, we need to be open-minded about what counts as usable “information.” A thoughtful and persuasive statement of mission or a persuasive success story should have value alongside a cost-effectiveness calculation. And having all of these is ideal.

  4. Michael Moody says:

    Let me add one more bit to my comment: The metrics folks are, is seems, ahead of the qualitative folks in terms of reflecting openly and collectively on their measures and, through this process, improving them. The qualitative folks need to become better at making and discussing a public case for the rigor of their measures, and at incorporating critique positively. I think this has been done–e.g., by professional evaluators of a certain stripe–but not to as much broad, current effect as the metrics discussion. This won’t be easy–partly because it IS so easy to produce poor quality qualitative info–but we need to try.

  5. Mike,
    Well with all due respect, we qualitative folks are too far off. The data collection is just different and what we look for (themes, patterns,commalities, preferences, etc…) has it’s place in research. I am not sure it’s about making a better case – we can in fact produce valuable, applicable and very practical findings.

    There is and should be BOTH measures. One isn’t better than the other. Just different.

  6. OOPSS. I meant we AREN’T to far off.

  7. Michael Moody says:


    You wrote, “…we can in fact produce valuable, applicable and very practical findings.” I agree! Maybe I wasn’t clear enough, in my attempt to find a middle path here. But I was arguing in FAVOR of more attention to qualitative methods, so we can SHOW how “valuable, applicable, and practical” they are.

    Qualitative measures are more useful and more rigorous than they are often given credit for, esp. these days amidst all the helpful discussion of the need for “better measures.” (Let me be clear: I say this discussion is helpful not because qualitative measures are bad and quantitative are “better,” but because I take “better” to apply to both qualitative and quantitative measures. Improving our measures of any sort is helpful. And what is more, this discussion of measures is helpful because it brings a lot of new, intelligent, well-meaning folks into the conversation about philanthropy.)

    The problem is the lack of public explanation and discussion of good qualitative measures (like there is now with quantitative ones), which is why I argue that a better “public case” for them needs to be made. The problem is not with using qualitative methods or measures (I’ve used them primarily in my own work – and defended them – for many years.)

    And of course I don’t think one type of method is better than another. My whole point – like yours – was that we need both.