It’s Christmas, the giving season, when we’re supposed to be generous with our time, hearts and wallets. But maybe this Christmas, we should think about what generosity really means and how it shows your true character, because everyone is a philanthropist when it’s easy.
To be clear, blog title aside, I’m not against billionaire philanthropists. I’m not saying that we shouldn’t appreciate people like Bill Gates and Warren Buffet. The philanthropy of the wealthy and their foundations play critical roles in our society and allow us to achieve so much more, especially through their patronage of education, science and the arts.
My point is that billionaires can afford to be generous and always do the right thing. It is always easy to do the right thing when it comes at very little personal cost or risk.
Think of a Billionaire donating $5 million to a worthwhile cause. Now imagine that Billionaire has $1 billion in an S&P 500 ETF (for simplicity’s sake), in the past year, by doing nothing, that $1 billion would have earned about $115 million (before fees). The $5 million donation, while generous, still leaves the Billionaire with $110 million in earnings and the original $1 billion is still working away and of course there are tax benefits, etc, etc.
Now think of that middle-class family in church whose wages have likely been stagnant for the past 15 years while costs of housing, education and healthcare have increased. Every Sunday they write a check and put it into the collection plate. Maybe it’s only $20, but that $20 every Sunday for 52 weeks a year ($1,040) is probably more valuable – especially as a part of their disposable income – to that family than the $5 million is to the billionaire. The family is forgoing earnings in order to be charitable -they could be investing that money and there is a good chance they are not investing/saving. While the billionaire is donating his or her earnings from working investments.
Who is Making the Bigger Sacrifice?
The math can be debated and the hard-core financial analyst will run me over the rocks and instead demonstrate how much more money the Billionaire is losing by donating vice re-investing and thus forgoing compound interest. However, there is a strong qualitative and quantitative argument (if you look at disposable income and risk) that the family is making a much larger sacrifice. The family is being generous in spite of their situation. Their future is uncertain and much riskier, yet they still give.
The billionaire philanthropist makes a large impact, by giving large amounts with little risk to their future financial stability.
The middle class family makes a small impact by giving small amounts but at high risk to their future financial stability.
So, is the lesson here that the family is making unwise economic decisions for little impact, so they shouldn’t give? No. Definitely not. Most charities depend on large pools of small donations. Most religious organizations depend on the small but regular donations of their parishioners. These small donations together have an out-sized impact. 89% of all American give charitable donations, individual donations make up 75% of all gifts given annually and 50% of households give to more than one cause annually (List, 2011).
What is Real Charity?
These small donors are TRULY giving. They don’t expect their name to be on a building and likely don’t make enough to benefit from the tax write-off, yet they still give and put themselves at risk in order to help others. It is REAL CHARITY.
The definition then of real charity should probably be:
Giving at Great Sacrifice
No wonder charities often say, “Give until it hurts.”
Everyone is Charitable when Times are Good
During economic booms and more significantly, during bull markets, charitable donations increase. John List’s 2011 paper, “The Market for Charitable Giving,” demonstrated that a 1% increase in the S&P 500 in one year will result in a 0.19% increase in charitable giving the following year.
…a 1 percent increase in last year’s S&P 500 is correlated with a 0.19 percent increase in charitable giving this year.
When people are optimistic and feeling flush, it makes sense that they become more generous. Rising asset values make people feel smarter and more successful even if they are simply riding a rising tide and thus more optimistic about their own success and future. These feelings of success lead to more charitable giving. Charitable giving helps to then increase their self-worth.
What is interesting is that John List also found that in economic downturns charitable donations go down, but not with the same impact as they do after economic upswings. During downturns, charitable giving is more “sticky,” likely because of social pressure or previous commitments. The relationship of charitable giving to several other aggregates—GDP, consumption expenditures, and unemployment—shows a similar relationship.
Nonetheless, donations do drop when times are harder.
Do Poor People Give More?
List also breaks down charitable donations by household income and there are some interesting results. According to data from 2004, giving to charities increases with income and education. 93% of all households with incomes over $130,000 gave and the average annual amount was $4,644. 58% of households with incomes between $20 and 40,000 gave and that average amount was $1,408. However, as a percent of family income, the lower income households give more. Annual donations average 5% of family income for households between $20 and $40K, while only 2% for households with incomes above $130,000. But, the trend then changes, as households with income of $1 million to $5 million also give 5% of their annual income.
List gives many explanations for this U-shaped curve, though does not explain why it drops so low for +$130K households. For example, low-income households in the $20-$40K range may still be wealthy. Many of the high-commitment households in this income range are high-asset, retired members of the community. The absolute wealthiest individuals also make up some of the most significant giving with different studies reporting different numbers. So, wealthy individuals in America do give and are very, very important to the charity ecosystem. However, even with all the explanations, the lower income households that give, tend to give so much more than even the most wealthy (as a percentage of income).
Taken together, these data patterns suggest that although fewer poor households give money to charity compared to other income classes, the ones that do contribute give much more as a percentage of income than any other income class. – John List
The Real Lesson is About Character
The real lesson here is NOT that rich people are scum and don’t do enough. No.
The real lesson is actually NOT about charity or charitable donations at all.
My point is that your real character comes out when you have the most to lose.
People are always generous and good when they they feel flush or optimistic. But, generosity when times are good and you feel safe and secure doesn’t really show strength of character. You are not risking anything.
The better question is – how do you act when times are difficult? When you’re business is running out of money and the market doesn’t look good? How do you treat people then?
More than once, I have had the misfortune of working with people whose true character came out as the the economic situation deteriorated or their personal financial situation worsened. As things got worse and the business outlook looked tough, they became greedier and put themselves above others – taking more of the pie and in most cases ensuring the business failed. In each case, I always heard the same rationalization – “I was so generous to XX, back in XXXX.” as if past generosity during a more optimistic period justified their more current self-serving actions.
Past generosity during a more optimistic time does not justify greedy, self-serving behavior when things look bad. When I say there is no such thing as a billionaire philanthropist it means that you don’t get credit for doing the right thing when times are good. The only true test of character is how you act when you have everything to lose.
You don’t get credit for doing the right thing when times are good. The only true test of character is how you act when you have something to lose.
Imagine, you just ran through millions of dollars in your startup without gaining significant traction, thanks to your poor spending decisions. But, there is still a chance for the business to do well. What do you do? Do you fire key staff just to be able to keep yourself on salary for longer or do you take responsibility and step down? It is in scenarios like these where your true character will emerge.
It’s hard for some people to imagine these situations as real tests of character, so that’s why I like the “burning building” metaphor. Any situation where you put yourself first in a zero-sum game, e.g. getting paid and at the expense of colleagues or employees, is akin to pushing your co-workers to the floor so you can get out of a burning building first.
This scenario works well in other situations too, have you ever stopped to help someone on the street who was in trouble? Did you stop to help when you were also in a hurry and had a lot to do that day? Or did you only help because it was convenient to you at that time? The Good Samaritan study showed that we are more likely to step over a person in trouble, if we are in a hurry because in these situations we tend to put ourselves first.
I joined the military, because I wanted to be that person that sacrificed. I knew my actions during the worst times were what really counted and that’s how I wanted to I define myself. I don’t know, if I always live up to that goal. But it’s something I I strive for. It’s been very difficult for me as an entrepreneur to work with people on the other side – those that fall apart in times of crisis. Maybe this is why we need more Vetrepreneurs.
So during this holiday season, as you reflect on the year behind you and the one coming ahead, remember that real charity involves sacrifice.
Don’t judge yourself on how you acted during the best of times. True character is doing the right thing when you had something to lose.