According to the efficient market hypothesis, if all investors have the same information and behave rationally, all assets will be priced “correctly”. Under these conditions, it becomes impossible to consistently beat the market.

The efficient-market hypothesis is usually discussed in financial contexts, but it can in principle apply—or fail to apply—in any market, including philanthropy. If all philanthropists are trying to help others the most and rely upon publicly available information, the efficient-market hypothesis implies that philanthropic resources will be optimally allocated. The more efficient the market for philanthropy, the harder it is to identify outstanding giving opportunities (which are likely to have been already snapped up by previous funders).

The efficient-market hypothesis applied to financial markets is controversial, and there are good reasons to think that the philanthropy market is less efficient than financial markets. Maximizing return on investment is the predominant motivation among investors, whereas philanthropists are often motivated by other concerns. Furthermore, different donors have different moral beliefs, so even if each was motivated purely by moral considerations, lower levels of efficiency should be expected in the philanthropy market.

Still, it appears that the philanthropy market is at least partially efficient. For example, it is difficult to find funding opportunities to distribute vaccines: the evidence in favour of vaccine distribution is so overwhelming that distribution is generally funded by large institutional donors.

One way of “outperforming” the philanthropy market is to search for donation opportunities that are currently underfunded, perhaps because they have a less compelling or harder to understand narrative. For example, protection against global catastrophic risks may be underfunded because of scope insensitivity. As an increasingly larger proportion of philanthropists correctly identify underfunded opportunities—for instance, due to the growth of the effective altruism movement—the philanthropy market would become more efficient.