I’ve been thinking lately about Sudhir Venkatesh’s experiment in extreme poverty immersion and the lessons it holds for grantmakers. As I mentioned in that post, I’ve known only a tight-budget existence in my personal life thus far, which has been reinforced by four years working for a nonprofit with annual expenses in the $1.5 million range. One of the more striking things I’ve discovered this summer at the Hewlett Foundation, which is the fifth-largest charitable foundation in the United States by asset size at more than $9 billion and the third-largest by total giving, is that resource allocation is a totally different exercise in an environment like that than the ones I’m used to. I come from a background in which the following truths were self-evident:

  1. Anything you could get for free, you took for free.
  2. The success of a transaction was defined by the extent to which value was obtained relative to its cost — that is, whether or not it was a “good deal.”
  3. Each day was a struggle to achieve program success/personal goals while staying within budget, but anytime a choice had to be made, the latter definitely had priority.

The thing about this is, most goods in this country cost the same whether they are purchased by little ol’ you or me or a giant like Hewlett–and most of the time, the cost structure is built for the former rather than the latter. As a result, the opportunity costs of day-to-day expenditures are far less noticeable in big-budget land. So all of the sudden, my decision-making process had to be readjusted: my goal was no longer to maximize value relative to cost but rather total value, assuming the cost didn’t exceed some arbitrary high amount. I found this unexpectedly difficult, because the kinds of cost benchmarks I had relied on before had always been the same ones I used in my personal life. Ian David Moss, composer and graduate student, sure as hell would never drop a few hundred bucks on a data resource just to find out whether it was useful or not–but for the Hewlett Foundation, it might well be a good investment. I’m used to situations in which the minimum acceptable option is the only one I’d be willing to pay for.

There are good things and bad things about budgeting in an intensively resource-constrained environment. Obviously, the downside is that smaller nonprofits and lower-income people are often forced to settle for imperfect solutions. So, Curtis the squatter’s friends eat unhealthy fast food and canned fruit in order to survive from day to day, even though a healthier diet would help them avoid more serious problems down the road. On the other hand, limitations like this foster an appreciation for efficiency and utility that I would argue is absent from plusher environments. I became quite proud of my ability to spot market inefficiencies and take advantage of them during my pre-business-school days, whether that meant using printing companies that catered to cash-starved, image-conscious rockers and charged much less than the traditional press down the street, or eating at the taqueria with the $4 burritos. Rich people like to think that they know something about managing money. Well, let me tell you something: being poor will make you an expert in the subject. Poor folks, the smart ones anyway, beat the market on a more consistent basis than any hedge fund manager alive, and with higher stakes to boot.* That’s why microlending has worked in the developing world, and that’s why I’ve argued in the past that small arts organizations are a more cost-effective use of philanthropic dollars. What I haven’t been able to figure out yet is how to balance the quality gain of having the “optimal” solution over a “good enough” solution, versus the efficiency gain from distributing resources more stingily across a wider range of uses and looking for deals at every turn. Oh, where’s a logic model when I need one?

* given the diminishing marginal utility of money.

  • Adam Huttler

    Great stuff, Ian. The “relative value” vs. “total value” equation is a really important concept that a lot of small organizations don’t get. I touched on this a little bit in a recent blog post, albeit from the perspective of program investment. But I think you’ve accurately identified the social/psychological underpinnings for our industry’s “penny wise pound foolish” tendencies.

  • Ian David Moss

    Thanks, Adam. I actually meant the post more as a critique of big-budget thinking than an embrace of it, though. Imagine what would be possible if the same kind of discipline that Curtis imposed on his weekend budget were applied to a multi-million-dollar operation. Wouldn’t work for everything, but I would imagine that there are some situations in which it’s smarter to maximize consumer surplus instead of total value, don’t you think?