information for transformational people

Incentives 246Incentives to donate

From an article by Behavioral Scientist

Professor Uri Gneezy is the Epstein/Atkinson Endowed Chair in Behavioral Economics at the University of California, San Diego. He is the co-author of The Why Axis and, most recently, Mixed Signals.

Here is an abridged excerpt regarding donations:

Philanthropy has always emphasized the enormous potential and impact of giving. Many of us believe in the power of giving to create meaningful change.

In a 2013 TED Talk, the activist and fundraiser Dan Pallotta called out the double standard that drives our broken relationship with charities. He argued that when it comes to non-profits, we equate frugality with morality - we closely scrutinize non-profits’ spending, rewarding them for how little they spend instead of what they get done. We seem to have one rulebook for the non-profit sector and another for the rest of the economic world. We don’t judge CEOs of regular companies by how modest they are in their spending but by outcomes, such as the company’s profit. This rulebook discriminates against the non-profit sector and keeps non-profit organizations from realizing their full potential, Pallotta argued.

There is an overhead aversion. As an economist, I understand that when giving, I should care about the overall impact of my dollars and not the overhead of the charity. However, as a human being, I would feel bad passing the charity CEO in first class on the way to my economy seat in a plane. In other words, although I understand that I should care about impact rather than overhead, in practice, I care about both. And I’m certainly not alone: studies have shown that donors strongly prefer charities with low overhead regardless of cost-effectiveness.

Two reasons are typically used to explain why people don’t like charities with high overhead costs:

  1. High overhead might imply that the organization is inefficient and that the people who run it are bad at their jobs.
  2. High overhead might suggest corruption within the charity.

Although I recognize these two reasons, I also propose a third one directly related to the donor’s feelings and inspired by our first-class CEO thought experiment: donors want their money to have a direct impact on the cause they support. They might feel that they’ve made a greater impact when they know their contributions went directly toward the kids’ meals as opposed to the CEO’s first-class seat. In other words, thinking their money went entirely to the kids amplifies their self-signal and reassures them that they are good people for helping the needy.

Our team asked ourselves: Could this feeling be why people are averse to paying for overhead? Which one of the three reasons just described is the primary driver of overhead aversion? Apart from simple curiosity, we thought a better understanding of the reason behind this overhead aversion might lead to a new way to increase donations.

Our idea was motivated by a simple thought experiment: Imagine you are the CEO of a charity who just secured funds from a generous private donor to help launch a new fundraising campaign. How would you use this initial donation as an incentive designed to maximize contributions from other potential donors?

This isn’t just a hypothetical - board members in charity organizations ask this question all the time when they receive large donations. Traditionally, charities have used these initial financial gifts to solicit additional donations in two primary ways:

  1. Describing the initial donation as seed money (“a generous donor already gave us $10 million for the cause”) or
  2. Using a matching model in which the charity uses the initial funds to match every new dollar donated.

These two uses of initial donations - seed money and matching grants - have been studied and proven to be effective in increasing donor contributions. In our experiment, we wanted to use incentives as a diagnostic tool, offering a new fundraising approach that will reveal why people hate paying for overhead. To do this, we proposed a third alternative incentive: telling donors that their donation would be overhead-free.

We tested this idea with a foundation specializing in education. The foundation purchased the right to send a one-time donation-request letter to forty thousand potential U.S. donors who had donated to similar causes in the preceding five years. All participants were informed about the foundation’s new initiative, were told that the cost of the new program was $20,000, and were asked to donate toward this goal.

Together with the foundation, we secured the funds needed for the incentives and created four different groups; each received a different type of incentive to donate. Specifically, each group, consisting of ten thousand individuals randomly sampled from the list of forty thousand past donors, was sent one of the following incentives:

  1. Control group: No additional incentives were offered.
  2. Seed group: Participants were told that the foundation had already secured $10,000 for the project from a private donor.
  3. Match group: Participants were told that the foundation had already secured $10,000 for the project from a private donor that would be used as a matching grant. This grant would match every dollar donated up to $10,000.
  4. Overhead-free group: Participants were told that the foundation had already secured $10,000 for the project from a private donor that would be used to cover all overhead costs. Thus, every dollar collected would go directly toward the program.

We hypothesized that if we covered all the overhead costs associated with the project, we would incentivize donors to give, because they would have the assurance that every dollar they give would go directly to the cause.

The results? The seed and match treatments were effective in increasing the donation amount above the control, but the overhead treatment proved to be even more effective - almost double the donations of each of the seed and match groups.

The result was mainly driven by the fact that more people were convinced to donate in the overhead-free group. Incentivizing potential donors by informing them that overhead costs would be covered by an initial donation significantly increased the number of people deciding to donate and the total donation amount compared with the seed and matching incentive approaches.

These results helped us diagnose the reason behind overhead aversion; they showed that the alternative explanation was important: donors care not only about helping the cause but also about how doing so makes them feel.

Imagine instead that, as the person in charge of development in a hospital, you are facing a big donor who is about to give $5 million to your institution. You could tell the donor how the money will be used - on a new building or some state-of-the-art machines. Alternatively, you could try to convince the donor to use the donation to cover the overhead costs of raising money for hospital development. This conversation may allow the hospital to offer an overhead-free campaign for the smaller donors, all of whom care about whether they’re giving directly to the cause. Our research suggests that this approach - using the donation as an incentive in the form of overhead-free donations for smaller donors - may help increase the number of donations and the total donation amount. By allotting the money to cover overhead, the $5 million could go much further than if it were simply put toward a new building.

A prominent example of this approach at work is a non-profit called charity: water, which splits into two separate organizations: “charity: water,” which accepts donations that go entirely to the cause, and “The Well,” which consists of a dedicated group of private donors who pay for all the overhead expenses.

The relative efficiency of paying for overhead demonstrates how important it is to control the framing of the story. The three incentives we tested in this field experiment were exactly the same from a traditional economic point of view. However, the source of overhead aversion is not just worrying about corruption, inefficiencies, and overspending. Emphasizing donors’ personal impact is important. Find the frame that people care about, and your incentives will go further than ever.

Read the full article here.

Retweet about this article:



From an article by Behavioral Scientist, 23/05/2023

To submit a story or to publicise an event please contact us. Sign up for email here.