by Gneezy, Uri
Another thing that persuades people to try something new is, of course, good old-fashioned money. To find out what combination of money and social pressure would work to get people to switch bulbs, we worked with David Herberich and Michael Price on a large field experiment in which student solicitors—our secret agents—went knocking on nearly 9,000 households in the suburbs of Chicago.14
The people who answered their doors were offered up to two packages of CFLs to purchase. The bulbs cost between $3.75 and $7.15, but we set our baseline price at $5.00 a pack. We also tried selling them at $1.00 a pack—about the same price as a pack of old-fashioned bulbs. Additionally, the students plied various households with social pressure, saying, for instance, “Did you know that 70 percent of US households own at least one CFL?” or, if we wanted to really apply the social pressure thumbscrews, they said, “Did you know that 70 percent of the households we surveyed in this area own at least one CFL?”
We found that there are two ways to induce people to buy CFLs. One way is to lower the price. Most people think that the government should subsidize CFLs so that they cost as much as traditional bulbs. Unfortunately, that’s not going to happen when government budgets are shrinking. Our results, not surprisingly, show that this approach could work. A second way to get people to buy CFLs is to tell them that their neighbors use them. Reminding people of what their neighbors were doing worked in a way that was roughly equivalent to a 70 percent drop in price on the $5.00 pack. Importantly, when we came back and offered the CFLs at a low price, we found that people kept buying them.
So here’s the big takeaway: if you want people to adopt new behaviors, the best tool is a one-two punch of social norms and pricing, which work as complements and build on each other. Start with peer pressure: people really want to keep up with the Joneses, so let them know what the Joneses have done. This will get them into the market, so that they buy their very first pack of CFLs. Then, once they are owners, peer pressure really does not work that well. At this point, you need to offer the product at a lower price. They will then buy greater numbers of CFLs.
In this way, the combination of social norms and prices can do the trick in convincing people to buy green products. More broadly, when we have green technologies that promise to help the environment, the government (or businesses) should make their first steps into the market with social norms. After reaping the benefits of the social pressure, further social pressure will not work. That is when prices enter the picture.
It’s not often that academic economists studying endemic problems like poverty, homelessness, drug abuse, and crime get the opportunity to go beyond analyzing what has happened in the past, and instead get involved in generating models that could be implemented as public policy. So when we get an opportunity to work with people like Ron Huberman, who asked us how to properly design incentives in order to help solve many of society’s biggest problems, we get pretty excited. And we’d definitely like to see many, many more experiments happen.
Public officials typically focus on programs that have the biggest average impact. In reality, though, some programs work very well for some and not at all for others. What if we applied a scalpel to social problems instead of a hammer? Data from our experiments make it clear that no one rehabilitation program will help everyone. It may be that tailored programs like YAP, rather than applying a one-size-fits-all solution, may be more helpful in bringing at-risk people like the gangstas of Chicago around.
For example, what if the programs like the Culture of Calm could be scaled down, but be applied in a more targeted manner? For example, some students may respond strongest to social incentives like a Kanye West concert. Others may need financial incentives. The idea would be to do more than just identify some students as at-risk, but to run a battery of tests that would allow us to diagnose more fundamental reasons for behavioral problems and to prescribe interventions based on that diagnosis. That is, tailor the policy to the individual. For example, how can you reduce AIDS transmission, teenage pregnancy, pollution, and high school dropout rates?
Of course, running big field experiments takes time, energy, and courage. In belt-tightening times, it’s hard to think about spending money to conduct field experiments before applying social policies. But this is the wrong way to think about it: only by conducting research do we know what works, so that we can save money in the long run. And many experiments can be done virtually cost free. As Ron Huberman knows, it is possible to use research to improve outcomes for all of us—from children and the poor to planetary health.
CHAPTER NINE
What Really Makes People Give to Charity?
Don’t Appeal to People’s Hearts; Appeal to Their Vanity
When you see a homeless person in the street, or the disfigured face of a child on the cover of an envelope, or a Salvation Army volunteer ringing a bell during the holiday season, chances are you will be moved to open your pocketbook. And if you are like most Americans, you probably give time or money to worthy causes all around the world every year.
In fact, Americans tend to be a pretty generous bunch. Nine out of ten people in the United States donate time or money to at least one charitable cause every year. Charitable giving by individuals in the United States is now more than $300 billion dollars a year—about the size of Greece’s entire GDP. Add in charitable contributions by companies and foundations, and that number jumps much higher.1
In total, we’re talking about a gigantic amount of money. Over the past forty years, charitable foundations have popped up all over the place. Although this trend has certainly relieved the strain on the US federal government to provide such public goods as aid to the poor, one question remains largely unanswered: Why, exactly, do we give?
Most people would say they give because they want to help others. But is such altruism the only reason for people’s generosity? Our research reveals it is not. In fact, our multiple field experiments with several different charitable causes—which involved communications with over a million people—show compelling evidence that (brace yourself) our psychological reasons for donating are often more selfish than most of us would care to admit.
One obviously selfish reason for donating is the tax benefit we get from doing so. The US government effectively subsidizes our donations to causes that range from church auctions to saving the whales. Of course, even in the absence of tax relief, people still spend their hard-earned cash to help a cause; we usually don’t ask for a receipt from the homeless person.
So if we give for reasons other than pure generosity or tax benefits, what are those reasons? From a fundraising point of view, this is an important question. Surely people who raise money for charities need to know the underlying motivations for giving, why donors remain committed to the cause, and why funders might stop writing checks. Nonprofits also need to know how to increase donations, particularly in a time of massive cutbacks for services at the local, state, and federal levels. Additionally, the US government would probably be interested in finding out whether the billions of dollars citizens write off annually from their tax returns makes real economic sense. If the government were to cut back on tax breaks for charitable gifts, would people stop giving?
Like every type of organization, nonprofits rely on their own peculiar blend of conventional wisdom. In our travels, we have learned that people in every walk of life tend to follow the received wisdom of previous decision makers, or rely on “gut feelings” rather than verifiable data to make their decisions. In the charity world, for example, soliciting donations has been pretty much a matter of tradition and trial and error. When setting up the next pledge drive, fundraisers rely on past practices based more on anecdote than science.
But regardless of whether you run a charity, a corporation, an auto shop, or a startup business, operating on conventional wisdom is usually a silly thing to do, particularly when your stakeholders (your employees, the people you serve, and the people who support you with their dollars) count on you t
o intelligently manage things. In this and the following chapter, we slide the charity sector under the microscope and put some standard ways of doing things to the test.2
But our findings don’t just apply to charities. As you will see, they have wider implications for any organization.
Planting Seeds
The origins of our research in philanthropy date back to 1997, when John was a wet-behind-the-ears assistant professor from the University of Central Florida (UCF). At that time, John was spending most of his time testing economic theory, slowly making his way up the research hierarchy using field experiments in the only market he really knew well: sports card collecting.3
One day, John was approached by Tom Keon, the dean of the business school at UCF. Keon wanted UCF to become a top research institution. The only way to do that, Keon was convinced, was for each academic department in the business school to choose one niche area in which to specialize. After the department made its choice, he would funnel gobs and gobs of resources into that area.4
With a background in environmental and experimental economics, John decided that one of his niche areas should win the “contest.” After months of bickering and lobbying, the faculty voted nearly unanimously in favor of environmental economics, with experimental economics serving as a strong complement. It was a big day for John and his colleagues, who celebrated with beer and pizza.
Soon after the vote came in, Tom Keon delivered the winner’s spoils. “John, congratulations; your area has won. I have decided to make this really work, we need to start a Center for Environmental Policy Analysis” (CEPA, as it was later called). “And you are going to be in charge of that.”
John quaked in his loafers.5
“Of course, you’re going to have to go out and raise money for it,” the dean explained. “The school will give you $5,000 in seed money. You’re going to have to figure out how to use it to raise a lot more.”
John had never studied the public sector, and he didn’t know the first thing about fundraising beyond occasionally responding to some of the heart-wrenching pleas he regularly received in his mailbox at home. So he decided to do a little research into tactics for using seed money for a fledgling nonprofit. He read everything he could find on the subject, but absolutely no quantitative research existed about how much money was required to start a campaign. Indeed, he found little rigorous research of any sort. So he had to do his own research. What were the assumptions upon which this world of fundraising was built? He decided to talk to the fundraising experts at some of the largest charities in the world.
One afternoon he found himself chatting with a dapper, silver-haired gentleman in a tweed jacket who worked for a large animal-protection foundation. The conversation went something like this:
JOHN: The dean gave me $5,000 in seed money. How much more will we need to start a capital campaign?
HIM: Ah. There’s a silver bullet for this!
JOHN: Really?
HIM: Yes (leaning forward). You need 33 percent of your goal. So if you’re trying to raise $15,000, you need $5,000. 33 percent is the magic potion.
JOHN: Wow. That’s great, thanks! But how do you know it’s 33 percent? Why not 50 percent or 10 percent?
HIM: Because I’ve been in this business for a long, long time, and that’s how it’s done. It’s exactly 33 percent. If you start the campaign with more or less than that, the campaign will not raise as much money.
JOHN: But how do you know that’s the case? What’s the evidence for that? I haven’t been able to find any research on this . . .
HIM: (a little exasperated) I know because I learned it from my former boss, who was in fundraising for a long time himself. This is what we always do. Trust me.
JOHN: (equally exasperated) But how did he know?
You can see where this conversation was going. This well-meaning guy hadn’t given much serious thought of his own to raising more money. He knew much more about putting together a charitable gala than about fundraising innovation. But there John was, just a few weeks into his foray as a part-time charitable fundraiser, and he already seemed to have reached the depths of what some of the most accomplished folks in the business knew about seed money.
There is something “off” about charity, John thought. But people like the dapper gentleman were smart; what was missing? John concluded that they had not used economic field experiments to scientifically study the underpinnings for why people give. Their vibrant sector was driven by anecdotes, not science. This was disappointing but, for a young researcher, it represented a unique opportunity. Here was a sector that could importantly be influenced, and tremendously helped, by field experiments. In John’s mind, the end game would be a scientific revolution that dramatically changed the manner in which the charitable sector conducted its business.
Before getting into how seed money works, let’s try a little thought experiment just for fun. The following ideas are common in the fundraising world, and they are typical of the assumptions people make every day. (Some of them have been proven to work well—the others, not so much. In the course of the next two chapters, you’ll discover which gimmicks in each group have been shown to be the most effective, and why.)
Group A:
•1:1 matching grants (“If you call now, an anonymous donor will match your donation dollar-for-dollar—doubling your donation!”)
•2:1 matching grants (“tripling your donation!”)
•3:1 matching grants (“quadrupling your donation!”)
Group B:
•Lotteries (“If you donate, we’ll enter your name in a lottery.”)
•Refund and rebate offers (“If we don’t raise $20,000, you’ll get your donation back!”)
•Tontines (“The more you donate, the bigger the prize you stand to win!”)
Group C:
•Door-to-door solicitations
•Direct-mail campaigns with a picture of a suffering animal or child and an outer envelope that says, “Your donation can save a life today!”
•“We have $5,000 in seed money. Help us raise $25,000!”
The more we looked into it, the more we realized that everyone had an opinion about what worked and what didn’t. But there was little scientific evidence pointing to why people give money to charity, or why they respond to marketing schemes like these in general. Think about it: how often do marketing and sales people use tactics like this to coax prospective customers to part with their money? In fact, the whole economics of charity looked like a promising field of inquiry, because the implications, as you will see, apply broadly to just about every walk of life.
Follow the Leader
The first thing the research center needed was some new computers. Six, to be exact, and the $5,000 wasn’t going to cut it. So late one night, we got to talking with our friends and fellow economists James Andreoni and David Lucking-Reiley, and together we concocted a plan to develop our first test of charitable fundraising practices.6
We split the full capital campaign for the research center into several smaller campaigns to fund the six computers the center needed, and each campaign served as a separate experimental treatment. We sent several versions of the same solicitation letter to the homes of 3,000 central Floridians, explaining that the new Center for Environmental Policy Analysis (CEPA) at the University of Central Florida would examine local, state, and global environmental issues such as air and water pollution, endangered species protection, and biodiversity enhancement. Would they contribute some money to buy computers for the researchers?
In asking people to consider making a contribution toward the purchase of a $3,000 computer, we suggested different seed level amounts in a variety of treatments. In one letter, we said we’d already obtained 10 percent of the cost, so we asked for money to cover the remaining $2,700. In another letter, we said we’d raised 33 percent of the cost, so we asked for help in garnering $2,000 more. Another letter stated we’d raised 67 percent of the cost, so we hoped donors would chip i
n an additional $1,000. Some letters said that if we didn’t raise the money for the computers, the money would be used to cover CEPA’s operating expenses. Another treatment said that if we didn’t raise the money, we would refund the donation. All these different letters were accompanied by the usual “thank you,” a contribution form, and a postage-paid envelope. We sent the letters out and waited.
As the responses trickled in, we discovered that the received wisdom in the industry was correct, but only partially. Seed money does work to attract other donors. But the 33 percent number some of the experts had given us was completely wrong. As it turned out, giving increased when we told people we had 33 percent of the funds already raised, but it increased even more if we told them we had already raised 67 percent of the goal. At lower seed levels (say, 10 percent), the contributions dropped off.
It looked like the good people in the charity industry had been leaving free money on the table by focusing so intently on the 33 percent seed-money figure. Still, their combined intuition may not have been completely wrong. You see, seed-money levels convey competing pieces of information to prospective donors. On the one hand, you would think that the closer a charity comes to achieving a fundraising goal, the less a donor would feel she has to give to help reach the goal—she can “free ride” on the donations of others.
But on the other hand, donors are busy people. They don’t have time to investigate every detail of every charity, so they may look for signals from other donors. Saying you have raised a lot of seed money from an anonymous donor conveys that an “insider” has done her homework and has given a large gift.