by Gneezy, Uri
Basically, a tontine is an interesting mixture of group annuity, group life insurance, and a lottery, and it isn’t just the stuff of mysteries or comedies. Tontines have a fascinating place in economic history, and they played a major role in raising public funds in Europe during the seventeenth and eighteenth centuries. Tontines get their name from one Lorenzo Tonti, a Neapolitan of little distinction until his sponsor, Cardinal Mazarin of France (who was responsible for the country’s financial health), supported his position in the court of the French king in the 1650s.
In this capacity, Tonti proposed a form of life-contingent annuity with survivorship benefits whereby subscribers, who were placed into different age classes, would make a one-time payment of 300 livres to the government. Each year, the government would make a payment to each group equaling 5 percent of the total capital contributed by that group. These payments would be distributed among the surviving group members based on each participant’s share of the total group contributions. The government’s debt obligation would cease with the death of the last member of the group.
Based on their success in France, tontines spread. Governments used them to finance wars and municipal projects, such as the oldest standing bridge in London (the Richmond Bridge). Built in 1777, the bridge garnered its funding from shares priced at a then–hefty £100 each. Investors were promised an annual return based on the income from toll crossings. When one shareholder died, the surviving members received a share of the leftovers (which is why tontines seem custom made for murder mysteries and are banned in the United States).21
Tontines have a fascinating place in fiction as well. Agatha Christie used them as the underpinning for several novel plots, including Murder on the Orient Express. More recently, in an episode of The Simpsons, Abe Simpson and Mister Burns discover they served together in World War II, and their squad came to possess priceless German paintings that would go to the last surviving member of the squad. The Wrong Box, a wonderful old film starring Peter Cook, Dudley Moore, Ralph Richardson, John Mills, and many other comics, is based on an old Robert Louis Stevenson story in which nephews of a tontine’s last surviving member fight over the fortune.
Because we knew, based on our earlier research, that lotteries help increase charitable donations, we wondered whether tontines might do the same thing. That is: Rather than using tontines as a mechanism to finance government debt or provide a lifetime annuity for subscribers, could charitable organizations use them to elicit more donations? How would a tontine-like mechanism work in comparison to the other charitable ploys we’d examined?
First, think about our charitable lottery. For every dollar you give, you earn a raffle ticket; each raffle ticket represents a chance of winning the prize. So the more you give, the higher your odds of winning the prize. No matter how much money is raised, the prize doesn’t change; but, the chance of winning the raffle prize decreases as others give more, because the total number of raffle tickets increases.
If you think for a moment, however, it’s unclear why charities would focus on lotteries when reversing this structure might be ideal. A charitable tontine would work by giving each donor a fixed probability of winning a prize, with the size of the prize proportional to the amount donated.
For example, let’s say you walk into your county fair and discover that people at a booth are raising money for the American Cancer Society with the help of a charitable tontine. The nice volunteer tells you that no matter how much you give, you’ll have a 25 percent chance of winning a prize, but the more you give, the better the prize. Then she shows you the various tiers of prizes for which you’ll be competing. If you give less than $20, you’ll be eligible for a few small trinkets, such as a bookmark and a water bottle. For between $20 and $50, you’re eligible to win a bottle of fancy wine. For $50, you might win a shopping spree; for $100, a weekend vacation at a resort; and for $200, you get a shot at a new Lexus. You begin to think of your donation as an investment opportunity.
To test whether tontines might work this way, we joined Andreas Lange and Michael Price to devise a laboratory game played by students of the University of Maryland. The game was contrived, but financially very real. The students’ decisions had actual financial stakes, perhaps made deliciously salient by the conversion of tokens to cash.
Here’s how the game went: each student was clustered with other students. At the start of each round, each of the students got 100 tokens. They could either give those tokens to the public good (a charity in this case) or keep them. If they kept them, they would get a few cents for every token they kept. If they donated them, one of two things happened. In one condition, each token donated to the public good grew in value. So if you donated five tokens, they would grow in public value to six tokens. (This arrangement roughly reflects what happens when you donate to a charity. For example, when you donate blood to the Red Cross, your own blood isn’t worth much to you, but it’s really valuable to someone else. The increase in the value of each token in the public good was supposed to reflect this effect.)
In the other condition, everyone in a cluster benefitted from each donation. Even if you donated nothing to the public good, you could still enjoy the fruits of others’ donations. (Similarly, when Bill Gates gives billions of dollars to charities, he makes the world better off, but we don’t have to pay anything to enjoy the fruits of his generosity.) After being assigned to a cluster, the students had a simple decision to make: how much should they keep and how much should they give to the public good? But then we added an extra wrinkle: we entered them into either a lottery or a tontine.
We found that tontines outperformed lotteries in two very important instances. First, in cases where people have very different tastes, tontines raise much more money than lotteries. When people really diverge in their preferences for what is being offered, tontines can be a very good tool to get the people who like it to give more. Second, when people are really risk averse—say, they don’t like to gamble or place much of their money at risk—the tontine is a good tool to raise money. Since both of these features—people are different and people are risk averse—represent the world today, the tontine is a viable tool for fundraisers.
The results of our experiments also suggested people are much more likely to donate when they’re invested in the game. This finding makes sense—after all, if you feel the charity is trustworthy (remember the follow-the-leader effect?), and if you stand a chance of “winning” with it now or in the future, you are more likely to respond to its appeals.
All told, our research suggests that giving is less about doing something good for others and more about doing something good for oneself. “This is less depressing than it may sound,” wrote David Leonhardt, who summarized our results in the New York Times Magazine as follows:
For one thing, the charities are still getting the money, no matter what the donors’ motives are, and many of them are putting it to good use. For another, the warm-glow theory means that philanthropy can be more than a zero-sum game. If giving were strictly rational, the announcement of a big donation might lead other people to give less to the cause; they might figure it no longer needs their money as much. Thanks to the warm glow, though, Warren Buffett’s $31 billion gift to the Gates Foundation won’t cause other people to think that they no longer need to help fight dysentery. If anything, Buffett’s gift might make them more likely to make a donation. They can then have the sense that they’re joining forces with someone else—with Warren Buffett, no less—and becoming part of a larger cause.22
This is a key point, and one that cannot be understated: while human behavior might seem irrational, everything changes once you understand what motivates people to act. Once you understand people’s motivations, you realize that their behavior is, from their point of view, quite rational. We are all just trying to satisfy different wants and needs, but these don’t fit into traditional, boxed-up assumptions, fixed ideas and hand-me-down recipes and traditional ways of doing things.
/> As we observed in Chapter 1, for example, people imagine that a gym membership will inspire them to work out far more often than it really does. So they purchase the monthly membership in hopes that will be the case. They may end up not working out as often as they planned, but they had a rational reason for signing up in the first place.
Returning to our experiment on matching gifts, then, it makes sense that having a match in place works, but that higher match levels work no better than smaller ones. As an example, consider what some economists claim is a major national problem: we do not save enough for our retirements. How do most of us save? Usually our employers match what we place in a 401k retirement savings plan. As our colleagues Richard Thaler and Cass Sunstein point out, people who put money into their 401ks contribute exactly the same amount that triggers the match. If an employer matches the first 5 percent of salary 1:1, then people will save exactly 5 percent of their salary. But if an employer matches the first 5 percent of salary 1:2 (the employer contributes $0.50 for each $1.00 that you save), then people still save exactly 5 percent of their salary.
This might have seemed puzzling at first, but it is directly in line with our findings. So, can we leverage this behavioral insight to make the world a better place? If we are convinced that people need to save more, here is what we can do. Companies that currently match the first 5 percent of salary 1:1 should simply say, “We have decided to change our retirement plan. We will now match the first 10 percent of salary 1:2.”
What will happen? Let’s say you are someone who currently earns $50,000 per year. Under the old regime, you will personally save $2,500 and your employer will match with $2,500, for a total savings of $5,000. Under the new scheme, you will save $5,000 and the employer will match with $2,500, for a total savings of $7,500. By simply changing the rules, the employer has raised your savings and it does not cost the company an additional penny. Assuming the US government supported such a change to 401k rules, a simple policy solution could be put in place, and you and millions of others would save much more.
In the end, giving to charity is nothing like purchasing a Snickers bar; it’s more about doing the right thing and joining a fight, and feeling good about what you give. In this way, giving to charity is just as much about your personal proclivities as it is about the effect of your gift. If you are a silver-haired CEO of a philanthropic organization, then, you must understand that donors respond to triggers that are different from the ones you have traditionally applied, or your charity will not reach its potential.
In the next chapter, we’ll explore strategies that a specific charity used to raise money and learn more about the ways people respond to one special “trigger.”
CHAPTER TEN
What Can Cleft Palates and Opt-Out Boxes Teach Us About People’s Reasons for Giving to Charity?
The Remarkable Phenomenon of Reciprocity
Smile if you recognize this face:
If you don’t know her, you should. Her name is Pinki Sonkar, and she’s the star of a 2008 Academy Award–winning documentary called Smile Pinki.
Pinki was born in the poor rural village of Mirzapur, India. She spent her days sitting in the corner of her house. She dared not go outside because people would point and stare at her. She wasn’t even allowed to go to school. She felt hurt and angry and wanted to know why she was different from others. Her father was certain she would never be able to marry and said she would be better off dead. One day, she met a kind social worker named Pankaj who, in turn, introduced her to a doctor named Subodh Kumar Singh.
Do you recognize her now?
Pinki’s was no uncommon malady. Approximately 35,000 Indian children are born with cleft lips and palates every year, and millions around the world suffer as Pinki did. Their parents, who can’t afford surgery, often leave them in ditches on the side of a road, feeling as if a curse has fallen on them, and the children who aren’t abandoned are kept hidden away in shame. Eating and breathing is difficult for them. If they survive, children with clefts are shunned by their peers at school and by their communities.
The faces of children with cleft lips are ubiquitous, thanks to Smile Train’s ads in newspapers, magazines, and, of course, the award-winning film. The ads have generated millions of dollars in donations for the charity, which offers free surgeries to children in developing countries around the world who suffer from this common, easily corrected birth defect, one never seen in the United States because it is corrected shortly after birth.
Today, Pinki is a hometown celebrity. She has many friends, and she likes to wear lip gloss.1 And she is one of 100,000 kids around the world who get their cleft palates fixed for free annually because of some out-of-the-box experimental thinking on the part of one Brian Mullaney, the cofounder of Smile Train and WonderWork.org.
In the previous chapter, we learned that people are motivated by many things—their own human desire for a “warm glow” feeling, among others. Here, we’ll show how a unique field experiment using direct mail, and based on principles that apply equally well in business, made a huge difference for Pinki and millions like her by appealing, once more, to a fundamental human desire.
A Sister’s Curse, a Brother’s Gift
Brian Mullaney is one of those curly haired, blue-eyed, fighting-Irish guys you meet in an airport bar during a long layover. The light in his eyes shines with intelligence, candor, and a dancing, catch-me-if-you-can entrepreneurial spirit. He has a friendly, distinguished, Harvard-by-way-of-Ohio way of speaking that is simultaneously incisive and casual. You sit down at the bar, and he asks you your name, where you are off to, and what you do for a living. Soon you find yourself buying him a Guinness, passing him a business card, and saying, “So what about you?” Then, shoulder to shoulder, you listen to his story.
Mullaney, who was born in 1959 in Dayton, Ohio, is the second-oldest of five children in a strict Catholic family, the son of a line of lawyers on his father’s side. His paternal grandmother, Beatrice, was one of the first women to graduate from Boston University Law School in the 1920s, and she became the first female judge in Massachusetts. His father, Joseph, graduated from Harvard Law School after spending some time in the ROTC; he rose to become a government and corporate attorney, and eventually a vice chairman of Gillette. His stay-at-home mom, Rosemary, was a product of Stone-hill College and Brandeis University.
The Mullaneys were a tight-knit, happy family until tragedy struck when Brian was eleven. His adored, beautiful little sister Maura contracted a high fever and was diagnosed with an autoimmune condition called Stevens-Johnson syndrome, which resulted in a bloody rash that spread and blistered, eventually causing the top layer of the skin on her face to die and peel away in sheets.
Within weeks of the fever, Maura went from being a healthy, pretty eight-year-old to what Brian Mullaney describes as a “ninety-year-old shell” bound to a wheelchair. Though she was blind and in constant pain, she bravely tried to return to school. But the other children teased and taunted her. Brian protected her as best he could, but he deeply resented the fact that Maura was ostracized on the basis of her looks. She died at the age of ten. Brian was only thirteen, and yet he keenly felt the injustice of the treatment Maura received from those who did not understand her suffering.
After what happened to Maura, Brian transformed from a pious, well-behaved altar boy to a rebellious, indignant, out-of-control teenager who cared only about basketball and hanging out with his friends. By the time he was in the ninth grade, he was flunking out. His parents yanked him out of public school and marched him to a private, jacket-and-tie boys’ school where kids who got bad grades were teased. So he turned himself around and wound up going to Harvard, where he majored in business economics and began sharpening a healthy disrespect for status-quo thinking. He started by producing editorial cartoons for the Harvard Crimson.
The cartoons, some of which poked at hypocrisy, got him in trouble. In one cartoon, which he produced when the openly gay Massachusetts repre
sentative Barney Frank was first running for office in 1980, Brian ribbed the Catholic Church, whose priests were telling parishioners not to vote for Frank. The cartoon showed two men leaving church after confession, where the priest has told them to atone for their sins. One says to another, “I didn’t mind the 20 Hail Marys for cheating on my wife, but the 50 Our Fathers for voting for Barney Frank was a little too much.” “The Catholics on campus hated me for that,” Brian says.
But things got much worse when he made fun of the policies of Harvard’s nascent Third World Center. The center, which was going to be dedicated to serving the needs of minority students, stipulated that no white people could serve on its board because Harvard already had too many Caucasians. In his cartoon, Brian—who hated racism of any kind, including the reverse sort—drew a picture of a castle with a sign that said “No Whites Allowed” on it, and a caricature of the then president of Harvard, Derek Bok, handing bags of money to a black man and a Chinese man on the steps. The caption showed Bok saying, “Go away, Honkey. It’s President Bok, and I’m here with your funding!” The black students went wild, labeled Brian a racist, and stormed the editorial offices of the Crimson. The editor hid under his desk, and Brian was forced to hire personal protection and a defense attorney. “It was horrible,” he recalls.
One day, Brian got the bright idea of earning some money for himself as an ad man. He donned a suit and tie, and approached businesses around Boston, telling them he could produce advertisements, jingles, and posters for them. He did pretty well for himself in this field, and after graduation, landed a job at Young & Rubicam as a copywriter, much to the dismay of his parents. “They asked me, ‘Why did we spend all that money sending you to Harvard and then you go into an industry where you don’t even need a college degree?’” Brian recalls.