Giving advice for the greater good: why economists should work with charities

This article has been published on The Conversation.

 

Giving advice for the greater good: why economists should work with charities

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It’s possible for economists and charities to enjoy a mutually beneficial relationship. Kristopher Wilson

 

It is a well-established tradition in the legal and accounting worlds, where lawyers and accountants would provide pro bono legal and accounting services to the voluntary sector. It has also become common for businessmen like Richard Branson, Warren Buffett and Bill Gates to donate money or lend their skills to society.

However, this kind of engagement has not been seen in economics till recently.

What is Pro Bono Economics?

In September 2009, a group of prominent UK private and government economists, including Sir Gus O’Donnell, launched a project called Pro Bono Economics. The concept is simple – matching volunteer economists with charities wishing to address questions around measurements, results and impact.

Few charities make use of economists. There are two reasons why this market is missing. First, most charities cannot afford to pay economists to analyse the effectiveness of their work. Second, there are information failures on both sides. On the supply side, economists are unaware that their skill sets can be useful in evaluating the effectiveness of charities. On the demand side, charities often do not understand the value of economic analysis to their business and hence do not seek it.

Pro Bono Economics is a UK-based charity. Currently, the organisation has in excess of 150 volunteers. Of these volunteers, over half are from the private sector, around a third are from the public sector, while the remainder are academics and individuals. The organisation has a relationship with the UK Government Economic Service, which allows them to find volunteers in various government departments.

So far, eight projects with a variety of charities have been completed. An example is the work done by the volunteer economists for Barnardo’s. Barnardo’s work with those who have been sexually exploited is clear. However, using a rigorous research framework, the volunteer economists at Pro Bono Economics show that the benefits to the taxpayers of Barnardo’s interventions for young people who have been sexually exploited far outweigh the costs. There is a potential saving of either £6 or £12 for every £1 spent, depending on the assumptions made. There is now tangible, economic evidence of the necessity for specialist help, highlighting its value to the society as a whole.

A further check with Pro Bono Economics reveals that the organisation has only, so far, been able to engage about half of their volunteer pool with projects. In fact, the organisation has found that the interest from economists has so far exceeded the demand from charities, or the number of feasible projects from these charities.

A non-zero-sum game

Charitable giving by individuals is not rationally based and often personal and quirky. This is a conclusion that is well embraced by economists. Research has shown that donors want to be inspired and shown individual illustrations of the kind of good they can do for society.

However, this can be potentially a “win-win” situation for charities and economists. In the coming years, many charities around the world could face a financial squeeze as recession hits private donors and governments are forced to slash spending. This means that charities will need to fight to win funding, and individual charities will have to think hard about the best ways to present their causes and to appeal to donors. There will be an increasing need for charities to show that their projects are effective and delivering value for money.

This is where volunteer economists can help.

Getting involved with charities can help the dismal science as well. After all, economists are known to be inherently attracted to transactions that encourage self-interested behaviour, having been exposed to the “homo economicus” model. The profession has suffered severe criticisms over the past few years for failing to foresee the credit crisis, which has been demoralising for some, particularly those working in the financial sector. If more economists could volunteer their skills and time for the voluntary sector, the image of economics might improve. For individual economists, such experiences in real-life scenarios could be inspirational and enhance day-to-day commercial work.

Universal implications of pro bono economics

According to the Australian Bureau of Statistics, there were 41,008 not-for-profit organisations in Australia at the end of June 2007.

The main source of income for these organisations was funding from federal, state and local government, accounting for 33.5% of total income. The latest statistics from the Australian Taxation Office showed that there were 53,773 tax concession charities at the end of October 2010.

Most charities took a hammering during the global financial crisis. In the 2008-09 income year, individuals claimed $2,093 million in deductible gifts, a decrease of 10.8% on the previous and the first decrease in the last ten years.

With 50,000 charities in Australia, it can be a challenge to decide which charities are worthy of your hard-earned cash. Besides, Philanthropy Australia has found that Australians are not as generous as their peers in the UK and Canada. The overall giving levels as a percentage of GDP are slightly lower in Australia than in the UK and Canada.

With evidence of sluggish economic growth in Australia for 2012, charities in Australia are likely to face a similar outlook as their peers in Europe and the United States. This would mean charities in Australia could possibly face a decline in government funding and would need to fight to win funding.

There would be an increasing need for charities to prove to their donors that their impact have been effective. Volunteer economists can help to evaluate the effectiveness of these charities.

An “economists’ charity” for Australia?

Pro Bono Economics is a UK-based charity and is only working in the UK at present. At present, the organisation is funded by a number of grant-giving bodies such as the City Bridge Trust and a small number of individual donors. At the moment, the focus of the organisation is to ensure sustainable operation in the UK, before looking to expand internationally.

But the concept of “pro bono economics” is a universal one and can also be implemented in Australia. This is certainly by no means an easy concept to put to practice, but the project yields significant benefits: it seeks to improve the effectiveness of charities in Australia and allows economists to contribute both to society and to their professional development.

For some, pro bono economics may appear to be a concept where economists are seeking atonement for past sins. However, the truth is that economists have a skill set that the society can harness. More often than ever, it isn’t that economists are not charitably inclined; but they do not realise there are opportunities to contribute positively to society by using their skills.

Currently, pro bono economics engagements exist in Australia. However, such engagements occur on an uncoordinated basis. For example, Melbourne-based consultancy, Economists at Large, and academics like John Quiggin do pro bono economics work from time to time. The pro bono economics consulting work done at Economists at Large is funded by their paid work and donations from clients.

The existence of such pro bono economics engagements indicates a market for providing economic services to charities in Australia. It would seem ideal to have an organisation, seen as the “economists’ charity”, that coordinate pro bono economics engagements in Australia. The objectives of such an organisation would be similar to what the National Pro Bono Resource Centre does for the legal sector in Australia. The long-term sustainability of such an ambitious initiative is likely only to be achieved if it starts from within the profession.

 

This article was originally published at The Conversation.
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The benefits of being in two minds

The following article is my latest piece published at The Conversation.

The idea for this piece came about when I started reading Kahneman’s book Thinking Fast and Slow. Kahneman writes about the System 1 and 2 way of thinking, and how we utilise both systems. However, in reality, what I have really observed in people around me, including myself, is a polarisation in the degree in which either system is used. We seem to be either a System 1 or System 2 thinker in our daily lives.

The benefits of being in two minds

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Are you a rational thinker, or do you make decisions based on intuition?
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Are you the “lazy” or the “deliberate” thinker? Why can’t we have a hybrid?

Something has been bugging me for quite a while – how difficult it is to strike a balance between thinking fast, albeit impulsively and intuitively, and the slower, more cautious and deliberated sort of thinking.

Pause for a moment and observe your surroundings.

Consider my friend, Mr W. He makes snap judgments and decisions, rattles off the first thing on his mind without bothering whether what he says makes any sense. Unfortunately, he often annoys the ones around him. This is what psychologists Keith Stanovich and Richard West refer to as System 1. System 1 operates automatically and quickly, and is effortless. This system likes to avoid choices as much as possible, and often select the default option. System 1 is also what we utilise when we are driving.

On the other extreme end, meet my other friend, Mr F. He pauses and deliberates on his choice of words before he talks and makes any decisions. This sometimes borders on overanalysing, especially when the decision can be as small as what to have for lunch. This is System 2 at work, often associated with deductive reasoning and is honestly an awful lot of work.

The differences in the thinking processes of System 1 and 2 are perhaps the most distinct and observable in the economics classes I have tutored. During class participation, there are always students who seemingly accept and offer a superficially plausible answer that comes readily to mind. Often, these answers are what we see as illogical and irrational in economics. System 1 is the greatest source of irrationality and appears to be the bad guy in this story.

However, System 1 is not irrational all the time. For example, System 1’s accomplishment includes the ability to provide “expert intuition”, in which with much practice, a trained expert such as a doctor of firefighter can unconsciously go with their gut feeling and produce the right response to complex emergencies.

Then, there is another group of students who would take a minute or two to think before offering a more rational and logical answer.

In Nobel laureate Daniel Kahneman’s book Thinking, Fast and Slow, he presents our thinking process as consisting of two systems: System 1 and 2. Kahneman claims that there is too much going on in our lives for System 2 to analyse everything. So, System 2 has to pick its moments with care, and is “lazy” out of necessity.

I am increasingly convinced that there exists a polarisation in the degree to which either system of thinking is utilised by people on a daily basis. Most of us seem to be either mainly a System 1 or a System 2 thinker.

Some people are closer to their system 1, like Mr W. I am always marvelled at the ease with which people such as Mr W are able to convince themselves that the first thing that comes to their mind is always right. At this point, I am tempted to jump the gun and categorise Mr W as a “lazy” thinker. But that would make me a “lazy” thinker as well.

There are others who are closer to their System 2 like Mr F, who possibly belongs to a small elite group of proficient System 2 people, far shrewder than System 1 people. These are the “engaged” thinkers; Stanovich would call them more rational, but not necessarily more intelligent.

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However, I would like to think that the degree in which we tend to favour either system of thinking is habitual and something that can be consciously changed – perhaps not totally, but in a manner that benefits us. Ideally, System 1 thinkers should start to observe and recognise the errors that originate from this system of thinking, and learn to pause and seek reinforcement from System 2 in appropriate situations. On the other hand, System 2 thinkers should know that it is unnecessary to think critically in all situations, although it can be disastrous in other situations. However, allowing our intuition and gut feeling to take over in some situations can be good.

Organisations and governments are also able to help by using behavioural economics in their policies and decision-making processes. In fact, this is exactly what the US government did. It recognised that many of us undoubtedly are more prone to System 1’s manner of thinking. To tackle the problem of inadequate retirement saving in defined contribution plans, under the sponsorship of the US congress, Richard Thaler and Shlomo Benartzi of the Anderson School at UCLA have developed a plan called Save More Tomorrow (SMT). The SMT plan is a financial plan that firms can offer their employees. Those who sign on allow the employer to increase their contribution to their saving plan by a fixed proportion whenever they receive a raise. The increased saving rate is implemented automatically until the employee gives notice that she wants to opt out of it.

So why does this appeal to the System 1 thinker? In developing the plan, the authors addressed the issue of procrastination, which economists refer to as inertia. For example, the authors recognise that most workers may never bother to increase their savings rate over time. By making future increases in savings rate automatic, the plan eliminates the need for additional actions on the part of the participant. Besides, inertia is often so powerful that few will ever get round to opting out once enrolled in the plan. This plan has managed to align the laziness of System 2 with the long-term interests of the workers, recognising that System 1 likes the default option.

It is difficult to come to a consensus on which system of thinking is more superior than the other, particularly when both systems are essential in our everyday lives. The ability to combine elements of both System 1 and 2 thinking into a hybrid system of thinking for everyday lives will present ongoing challenges and implications for policymaking. This goes to re-emphasise a long-known fact that policies built on the concept of Homo economicus are inappropriate. The ability for governments and institutions to tailor policies to the needs of “hybrid” human beings will be important – and perhaps it will make a crucial difference for society.

 

This article was originally published at The Conversation.
Read the original article.