How many times have we heard critics say that donor decisions in the nonprofit sector are all too often subjective and irrational? Why, say these critics, can’t nonprofit decisions be more like those in the so-called real world, where decisions about stocks and houses are based on rationality and solid facts and figures? They say we need more rigorous criteria to make decisions, more focus on metrics to track performance, and a better way to measure outcomes.
Now I’m not disagreeing with the advocates of introducing more rationality into philanthropy. After all, that is one of the bedrock positions on which GuideStar is based. We believe that armed with more information, donors can indeed make better and more informed decisions.
But I’ve just finished reading a fascinating book by Robert J. Shiller called Irrational Exuberance (taken from Alan Greenspan’s famous speech in 1996), and if you think the so-called real world is the perfect model for what we want to do in the nonprofit world, you may want to think again.
Shiller is a professor at Yale, a prolific author, and co-creator of the S&P/Case-Shiller Home Price Indices, the place where we learn the depressing news about the declining values of our homes. So he comes with some credibility to his subject matter. Shiller’s book tries to explain why our economy seems to experience a constant roller-coaster ride of boom and bust. You can learn more about his book here: www.irrationalexuberance.com/index.htm.
Shiller gives many reasons for why irrational exuberance happens, but it all boils down to this: people make lots of irrational decisions.
Here’s how he sums it up:
The high valuations that the stock market attained at its peak in 2000, and the relatively high valuations that it still shows today, came about for no good reasons. The high valuations that the prices of homes attained in many markets by the opening years of the twenty-first century came about for no better reasons. The high stock market levels did not, as so many imagine, represent the consensus judgment of experts who have carefully weighed the long term evidence. The markets have been high because of the combined effect of indifferent thinking by millions of people, very few of whom have felt the need to perform careful research on the long term investment value, and who are motivated substantially by their own emotions, random attentions, and perceptions of conventional wisdom. Their all too human behavior has been heavily influenced by news media that are interested in attracting viewers or readers, with limited incentive to discipline their viewers or readers with the type of quantitative analysis that might give them a correct impression of fundamental value.
Wow, let me repeat that again: “motivated substantially by their own emotions, random attentions, and perceptions of conventional wisdom.”
My conclusion: Continue to give with your heart. Sprinkle in some passion, too. Try, if you can, to introduce methods for a more rigorous analysis and steer more of your giving to the those who can demonstrate they are high-performing organizations. But whatever you do, don’t use the same methods you used to select your last stocks or purchase your home.
The preceding is a guest post Bob Ottenhoff, Chief Executive of the Center for Disaster Philanthropy. With an entrepreneurial spirit, strong technology focus, and a quest to make an impact in the world, Bob has the ability to take an organization and lead it into strong performance, sustainability, and industry leadership.