Where to give your money this holiday season, according to behavioral economics

Note from Paul Solman: Dean Karlan is a Yale behavioral economist with a mission, a mission almost all economists used to share and many would insist they still do: to improve human welfare. Not “welfare,” as in government programs to subsidize those who can’t make a living, but welfare, as in the dictionary definition: “happiness, well-being, or prosperity” – for everyone.

One approach is to help individuals behave in ways that maximize their long-term interest – by stopping smoking, say, or losing weight. And so Karlan has developed a remarkably clever website, stickK.com, that “enables users to form commitment contracts to help them achieve their personal goals.” (Karlan and stickK.com will be featured in an upcoming piece of ours for the NewsHour.)


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But, like most of his colleagues in economics, Karlan is concerned about societal welfare as well. And for most economists, maximizing welfare means maximizing growth — on the assumption that “a rising tide lifts all boats.” Problem is, the tide lifts some boats a whole lot more than others.

Fortunately, many of us in more comfortable craft feel it’s only right to share some of our good fortune with those stuck in the mud. But how do we know where to give? Isn’t it legitimate to worry that our charitable giving might prove ineffectual or even do as much harm as good? Using the criterion of economics, how can we efficiently help those in need?

Yale’s Karlan has devoted much of his career to answering those questions too. And so, this holiday season, as a guide for the rest of us, I asked him: where does he give his money? Here are his answers.

Dean Karlan: I divide my thinking into short-run and long-run. For the long-run, I want to invest. I want to think about how we get better information, better evidence [for what we give], because we need to help future children, not just today’s children. In fact, there are many more children in the future than today so I put more money into the long-run. And for that, I support Innovations for Poverty Action which is doing research to figure out what works and what doesn’t.

But, I also do care about the short-run. So I also look at some of the things that we do have strong evidence on — where there have been really good tests to show that an idea works, and here’s a charity that’s doing it, so let’s support it.

This year there are three charities that stood out in the work that I was doing with my family, trying to think through what to support. One is called Trickle Up, which works a lot in West Africa and Latin America. A second is Seva Mandir which does work in India.

And a third is Evidence Action, an organization just started a year ago that is strictly committed to scaling up ideas that have been shown to work using randomized trials. They are doing two things right now. One is a de-worming program. This is a school-based de-worming program. De-worming, as in children who have intestinal worms, which gives them a distended belly and makes them lethargic and sick and not able to go to school. Taking a pill has been shown not only to improve their school attendance, but 10 years later, improve their income.

A second is a chlorine dispenser. It’s a nice example of a behavioral economics approach to a development problem. Evidence Action looked at the actual decision-making process for households: how they actually get their water and put chlorine in their water. And basically what was found is something fairly intuitive when you say it: if you bundle getting the chlorine with getting the water, then people are more likely to get chlorine into their water.

Put chlorine dispensers at the well, so that the moment you’re getting the water, boom, you put the chlorine right in. By the time you go home, the chlorine’s mixed in, and you have clean water. You solve the problem a lot more easily than if you need the chlorine to be put in the water as a separate step at home, or filter it, or something that requires an entire second step.

And the other advantage of a chlorine dispenser that sits at the village well is that it’s much cheaper to do, because you’re maintaining only one collection point for the chlorine; you’re not actually having to get chlorine into every single house.

Paul Solman: You started as somebody working in micro-finance, right?

Dean Karlan: Right.

Paul Solman: How is micro-finance as an intervention? How successful is it?

Dean Karlan: Let me divide up micro-finance into micro-credit versus micro-insurance and micro-savings. Micro-credit, which is where most of the money has been raised, is a fine intervention for investors to be making. It can improve credit markets for the poor. But it is not really a great use of donor money — partly because the investors are perfectly happy to invest, so let them invest. But also because it’s not lifting millions out of poverty. It’s not accomplishing the lofty goals and aspirations that people had.

Paul Solman: It isn’t?

Dean Karlan: No. It’s doing good. We’re not seeing evidence of mass harm.

Paul Solman: Well, how could it be harmful?

Dean Karlan: A lot of people are very critical of the industry because of the interest rates that are often charged.

Paul Solman: But why do you say it’s not achieving its goals?

Dean Karlan: There have been eight randomized trials on micro-credit, and they all have shown shockingly similar results. It’s really one of these striking cases where you set up eight tests across the world and you get back more or less the same answer in all the places.

Paul Solman: And the results are?

Dean Karlan: Modest improvements in the way people manage their life. Good improvements. But nothing transformational. You’re not taking people out of poverty in big numbers.

Paul Solman: So in Bangladesh, where micro-credit has gotten a tremendous amount of publicity because of Mohammed Yunnus, who won the Nobel Peace Prize for his work, people say, “Women are empowered, the fertility rate has gone down, and Bangladesh is in some sense, transformed, at least for women.” That’s not true?

Dean Karlan: Bangladesh may have been transformed for women, but attributing that to micro-credit, there’s not evidence to support that. Not the type of evidence that we look for. Of the eight randomized trials that looked at empowering women, for instance, seven of them found no impact whatsoever on empowering women. Only one study found any evidence of an improvement in decision making power for women.

Now, if you move over to micro-savings and micro-insurance, though, you can see much better results. Micro-savings, for instance. There have been a series of studies on commitment savings [as in what Karlan’s stickK.com website does], that have found helping people set up savings account that restrict their access to their money in some way is a really good thing. It helps people reach a savings goal, helps them invest more in their enterprise, if that’s what they’re going for, helps them make home improvements, if that’s what they want to save up for. And, actually, in the first study we did on this in the Philippines, it improved power for women in the household.

Micro-insurance, similar results. In northern Ghana, Innovations for Poverty Action has a large office in Tamale — there’s more poverty in Ghana up north. You have a lot of farmers not investing in their farms. If you hold focus groups, which we did, and you ask farmers, “Why aren’t you investing?,” a lot of them say, “Well, because I don’t have the money.” Makes sense. You also ask them, what about risk? What about rainfall? Are you not investing because of rainfall? They say, “Yeah, that too. If there’s really bad rainfall, a flood, or a draught, then I lose everything. So I’m not going to put fertilizer in, because I need to keep some money under the mattress, or I need to put some money into some other investment that’s not sensitive to rainfall.”

So we ran a simple test. We said, “Okay, fine. For some people, we’re going to give you some cash, and let’s see whether just giving you cash alleviates the ‘I don’t have cash’ problem, and allows you to invest more in your farm.” That tells you that there’s a credit constraint that’s really important.

A second group, we just gave them rainfall insurance. We just said to them, “If there’s a draught or a flood, we come back and we give you lots of money. Money equal to the value of the crop that you just lost.”

A third group got both.

And a fourth group was just left as-is, normal, with no intervention.

And what we found was that investment went up in all three of the groups. More fertilizer was invested in, more labor was hired, more land was cultivated. But the striking thing was that, from a cost-effectiveness perspective, we got all the action from the insurance group. Insurance alone created just as much action as the cash-only group.

So, the striking insight was that it’s not that people weren’t credit constrained, but they were very risk-constrained, and there was a lot of under-investment going on simply because of risk.

And this suggests that a scaled-up micro-insurance product that helps people absorb rainfall risk would be a very successful thing. [Scaled-up means extending micro-insurance across Ghana, or other parts of the world.]

So this is very much in the spirit of what Innovations for Poverty Action does. It has two parts. One part is figuring out what works and what doesn’t; the second is then going into the field and figuring out how to scale that up. So we’re now working with the government of Ghana and a re-insurance company and a Ghanaian insurance company to scale up rainfall insurance throughout the country of Ghana, based on the results from the initial study, finding these big improvements in investment as a result of getting access to rainfall insurance.


Paul Solman: I don’t know about you readers out there, but I was convinced. As “10-percenters,” like Karlan, my wife and I will be giving away 10 percent of our gross income again this year. Much of it will be going to Evidence Action, Trickle Up, Seva Mandir and Karlan’s baby, Innovations for Poverty Action, though I’m relieved to report that a long-favorite charity, Oxfam, makes the list of an organization Karlan endorses. (See The Life You Can Save.) Finally, there’s the well-researched list of Nicholas Kristof of the New York Times.