Today’s post is a little math heavy, but I think it reveals something interesting about the value of philanthropic activity.
In investing, “discount rates” are used to value what something delivered in the future is worth. For instance if I offered to give you $10 today or $10 in one year, you would likely choose to accept the money today. This is because if you wait a year you:
- don’t have use of the funds until then and;
- there is a risk that I might not deliver the money as promised.
These two elements (the “risk free rate” and the “risk premium”) are added together to determine a discount rate used to value the $10 delivered in one year.
Let’s say the discount rate is 10%. This means that $10 delivered in one year is worth $9 today. Or said differently you would find it equally valuable to receive $9 today or $10 in one year. The 10% discount rate reduces the value of money received in the future relative to money received today. This concept is a fundamental underpinning of investing. Except in very deflationary environments (when “inflation” is negative), discount rates are always positive.
Except when you start thinking about philanthropy.
Human’s have a evolutionary trait that makes us value our children’s lives more than our own. Human parents routinely make decisions that bring hardship on them, but produce benefits for their children.
If you are a parent you know exactly how you’d answer the question “if you could choose to have a crime free environment during the course of your entire lifetime or your child’s, which time period would you pick?” Every parent would choose that their children benefit over themselves. This implies that, at least when framed as a choice between themselves and their children, human’s exhibit the use of “negative discount rates” in valuing social goods.
This might be technical, but it is not trivial. Discount rates reduce the incentive to invest for the future. When investors face high discount rates, they require a more attractive return opportunity to make them invest. But a negative discount rate would dramatically lower the hurdle needed to invest and suddenly make massive investments in eradicating poverty and crime, enhancing education and the environment make far more financial sense than if you applied more normal discount rates.
So what does all this mean other than a thought experiment? It means:
- The social value created by enhancing our shared environment is much larger than normally thought and therefore worth a much larger financial commitment to make it happen and;
- It highlights the way that human thinking changes when you frame a decision as an individual one (your child) vs. a group decision (the next generation).
This last point starts to push us up against the moral ground explored by Peter Singer in his new book The Life You Can Save: Acting Now to End World Poverty. You can also get a taste of Singer’s moral reasoning from an extensive op-ed he wrote for the New York Times Magazine in 2006 titled What Should a Billionaire Give – and What Should You?
Singer’s line of reasoning offers a challenging argument that all of us must do much more to end global suffering. Right now.
It is well worth the read.