you ignore any information you can glean from knowing that "the other guy reallocates to $0/$1000"

Good point, but if your utility function over possible worlds is allowed to depend on the total sums donated to each charity and additionally on some aggregate information about other people's decisions ("the market" or "balance of power"), I think the argument still goes through, as long as the number of people is large enough that your aggregate information can't be perceptibly influenced by a single person's decision.

Again, the situation in politics, which is the real question (charity is just an unfortunate analogy), the stakes are even higher, so picking an extreme position is even less justified.

I'm not talking about the politics case, there are other problems with Cousin It's argument. I'm arguing with your 'refutation' of the non-diversifying principle.

Note that even those wealthy guys who are not in danger of living on the street, diversify, lest they lose a large chunk of their investment.

They may not be in danger of homelessness, but there is still diminishing returns. The difference between $1m and $2m is more important than the difference between $2m and $3m. Notice the operative word 'large' in your sentence. If those guys were just betting for amounts on the scale of $10, sufficiently small that the curve becomes basically linear, then they wouldn't diversify (if they were smart).

The situation with charity is somewhat similar, your donation is as small on the scale of the whole problem being fixed, and the whole amount being donated, as $10 is for a rich investment banker. The diminshing returns that exist do not have any effect on the scale of individuals.

Politics, if you insist on talking about it, is the same. Your personal influence has no effect on the marginal utilities, it is far too small.

Similarly, if you assign a large disutility to non-optimal charity, your utility losses from a failed one will not be in any way compensated by your other charities performing well.

Yes, if you donate to make yourself feel good (as opposed to helping people) and having all your money go to waste makes you feel exceptionally bad, then you should diversify. If you donate to help people, then you shouldn't assign an exceptionally large disutility to non-optimal-charity, you should assign utility precisely proportional to the number of lives you can save.