2013-06-10

Co.Exist

Relentless Monetization: The Moneyball Approach To Fighting Poverty

How an MIT-trained economist is driving one New York nonprofit to find the best value to society for each dollar they give away.

Relentless Monetization sounds like something that a startup or investment bank would pursue. In reality, it’s the poverty-fighting strategy wielded by The Robin Hood Foundation, a New York City philanthropic organization with a ruthless—and effective—system for funding only the best nonprofits in the region. In 2012, Robin Hood doled out $132 million in grants to over 200 poverty fighting nonprofits in the city.

Michael Weinstein, an MIT-trained economist who serves as Robin Hood’s senior vice president for programs, is the driving force behind the Relentless Monetization approach (and the co-author of The Robin Hood Rules for Smart Giving, a new book that dives into the principles behind Robin Hood’s work).

"From the time that Robin Hood was created [in 1988], there was always this notion of accountability and smartly choosing grants and not falling prey to mere protestations of do-goodism, but the intellectual structure was not in place," he explains. "We’d collect data on the cost of a grantee, but if you disconnect it from poverty-fighting benefits that grantees are producing, you can do harm as well as good."

In practical terms, this meant that Robin Hood had to figure out how to monetize the different kinds of benefits that grantees produce—to come up with a system where it could assign dollar values to benefits like graduating from high school. When Weinstein came on board 10 years ago, he started the process by looking at job training programs.

"We started with what we deemed to be the easiest grants we make for monetizing benefits," he explains. "Job training programs were more straightforward because the primary poverty-fighting benefit was straightforward: jobs that grantees would find and keep or not keep within a couple years of training." If you give money to an early childhood education program, you have to wait 15 years to see the outcomes. With a job training program, you’ll know what happens on a much shorter timeline.

In a 2009 book about measuring success, Weinstein explains the cost-benefit calculations of job training programs in more detail:

As with every grant, we estimate a benefit-cost ratio. The denominator of the ratio is straightforward. It measures the cost to Robin Hood of the grant, which in most cases is simply the size of the cash grant. The numerator of the benefit-cost ratio for these grants, representing the total benefits of a job-training program, must capture, in dollars, how much Robin Hood’s grant raises the earnings of trainees over their lifetime (compared to what they would have earned without the training). The numerator for other program types—for example, microcredit, charter school, mentoring, after-school, housing and health programs—are defined differently…But no matter what the program, the numerator of the benefit-cost ratio reflects a dollar estimate of poverty-fighting benefits. Once we have a set of benefit-cost ratios, we can consider shifting funds to programs with high benefit cost ratios from programs with low benefit-cost ratios. Shifting a dollar to Program A, whose benefit-cost ratio is 5:1, from Program B, whose benefit-cost ratio is 1:1, creates $4 of extra benefits for poor individuals ($5 on Program A minus $1 on Program B) at no additional expense to Robin Hood’s donors.

While calculating the benefits of job training programs, Weinstein came across a key piece of Robin Hood’s brand of venture philanthropy: measuring counterfactuals. It’s not enough to calculate the benefits of a job-training program; you have to also figure out what trainees would have learned had they never entered the program to begin with. "Control groups that get no training do better over time sometimes," says Weinstein. "We’ve tried to be very disciplined about not exaggerating our impact."

Estimating the cost-benefit ratio of job training programs is easy compared to most other programs. Take education. Most philanthropic literature focuses on the benefits of a high school diploma—for example, perhaps the acquisition of a diploma is reflected by a higher income of $6,500 a year. But what about other poverty-fighting impacts? Weinstein points out that high school graduation is linked to better health outcomes; if you take two identical people, and one graduates from high school while the other doesn’t, the person who graduates is likely to live for 1.8 extra years in good health. How do you monetize health?

Robin Hood has in large part adopted a system used by the National Institute for Health and Clinic Excellence (NICE) in the U.K. "In the U.S., we don’t have number we settle upon as a government, as a society of what the value is of extending life for one year in relatively good health," says Weinstein. "Britain set a number. Interventions that cost more than $50,000 per life per extra year lived in good health are not something that the NIH wants to pay for." So those 1.8 extra years of good health experienced by high school graduates are worth $90,000. Overall, a program that helps people graduate high school is worth $190,000 in poverty-fighting dollars per graduate, when the yearly salary boost is taken into account.

Weinstein admits that Robin Hood’s number-crunching isn’t always perfect: "We can’t wait until there’s proof-positive academic evidence for everything we do or else we’d still be waiting to make our first grant." And sometimes, Robin Hood has to create its own evidence. Outside of a handful of longitudinal studies from the 1960s and 1970s, for example, there is scant data on the effect of early childhood poverty interventions. So Robin Hood recently teamed up with an evaluation firm to run its own randomized control trial for interventions that it deems promising.

The first, a trial with four-year-olds placed in a math-intensive early childhood program, is now underway. Robin Hood will follow them until third grade—the assumption being that by then the organization will know if the kids who participated in the special math program are doing better than the kids who didn’t.

Robin Hood’s approach, while groundbreaking, is no longer entirely unique. Other organizations, such as the Gates Foundation, do similar cost-benefit analyses with their grants. No one, though, practices "relentless monetization of everything from showers in soup kitchens to needle exchanges," says Weinstein.

As young numbers-minded tech industry types continue to get rich quick, the Robin Hood model of monetization will only become more popular. Unsurprisingly, the majority of Robin Hood’s donors today are in the financial industry.

Weinstein hopes that the book pushes even more people to consider Robin Hood’s techniques. "We wrote the book for two reasons. One reason is that donors, other foundations, and philanthropists are often asking us to advise them, to share what we’re doing," he says. "The second reason is the opposite. We hope that by laying it out in black and white, we get feedback that tells us how to do things better. We already know our 170 equations [for monetization] are wrong. We’d love for people to say we have another wrong way to monetize interventions, but we have a less wrong way to do it."

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