The Charity Problem

Suppose you have a pile of US dollars dedicated toward making the world a better place. What is the most effective way to use the money toward that goal?

Let's refer to this question as the charity problem. The above statement of the problem is imperfect in at least the following two ways: We aren't always sure what it means to make the world "a better place"; and it is similarly unclear whether a "most effective" use for charititable funds exists.

However, these sticking points are not keeping people from making their best guess at how best to use their money to make the world a better place. The Center on Philanthropy at Indiana University estimates that American households in 2005 donated over 250 billion to various causes. Remarkably, only about 30 percent of these donations were aimed at helping "the poor." (See http://www.philanthropy.iupui.edu/Research/
Giving%20focused%20on%20meeting%20needs%20of%20the%20poor%20July%202007.pdf, page 30.)

Given that the charity problem is a multi-hundred billion dollar question, and given that so many of us donate some portion of our income to charitable causes, the lack of discussion on this topic is startling. To be fair, most of us have internalized at least the old saying, "It is better to teach a man to fish than to feed a man a fish." What are some other principles that can be applied to the globally-minded sector of philanthropy that aims to help the poorest of the worlds poor?