’Tis the time of year to give, but do charities benefit most from your heart, or your head?
In December, the combined stimulus of holiday spirit and end-of-year tax breaks creates one last chance for nonprofits to woo donors. Sixty dollars for the local soup kitchen, $30 for an international relief organization, $100 for the kids' school — the process of choosing and allocating money can be inscrutable even to the person writing the check.
For those who make it their business to understand human decision-making, charitable giving can be a challenging line of inquiry. The book Philanthrocapitalism celebrates the rise of donors, particularly billionaires like Warren Buffet and Bill Gates, who treat charitable giving as an investment.
However, coining a new term to describe such thinking indicates how uncommon it really is. How often do you grill your favorite charity about your donation's outcome?
Though Philanthropists with a capital P get most of the attention, the bulk of donations in the United States come from Americans of more modest means. In 2006, Americans gave about $295 billion to charity, of which 70 percent came from individuals rather than corporations or foundations, according to the Giving USA Foundation. And while anyone can fancy herself an investor, the evidence shows that most people act differently — some would say less rationally — when investing their money in a charity than in the stock market.
Last year, for instance, economists John List of the University of Chicago and Dean Karlan of Yale studied how potential donors respond to an offer to match their gift dollar for dollar. As expected, the offer caused donations to increase. But offering to triple or quadruple the matching grant had no further effect on giving. Donors ignored a chance to give their charity even better returns on the dollar, an unlikely scenario if their personal returns were at stake. (Download the paper, "Does Price Matter in Charitable Giving?" here.)
Charitable giving is complicated by what economists call "warm glow," the sense of self-satisfaction that can spur people to give their money to strangers. Clair Null, a Ph.D candidate in economics at the University of California, Berkeley, became interested in warm glow while conducting fieldwork in Kenya, where many people asked her to be their sponsor.
It could be gratifying to be someone's personal lifeline, Null thought, but her money would probably help more people if invested in a common good such as a well or a clinic. "There's an interesting tradeoff between what donors like and society's larger needs," she said.
Null attempts to parse out the competing influences of rational investment and good feeling in a recent paper, "Warm Glow & the 'New Philanthropy': Understanding Donors' Motivations." For her research, she recruited 179 members of Bay Area Lions, Kiwanis and Rotary clubs. Each subject was given $100 to spend on their club, plus any or all of three international charities — CARE, Oxfam America or Mercy Corps. Most subjects divided their money among at least two of the development charities.
Null then offered to match subjects' donations at different rates — CARE, for instance, might receive 50 cents on the dollar, while Oxfam would receive $2 — and asked the subjects to re-allocate their donations. Echoing the List and Karlan experiment, better matching rates did not prompt donors to drastically re-evaluate their giving — some gave only slightly more to the charity with the higher matching rate — and others gave less.
Why would donors spread their money around when they could maximize their donation by giving to a single charity? Null cites two possibilities: either the donors were risk averse, i.e. afraid of putting all their eggs in one basket, or giving to different charities simply made them feel good.
Yale's Karlan has studied Null's research and suggests another explanation: empathy for the little guy. "Donors could be thinking, 'I'm going to help the downtrodden one that didn't get a match,'" he said.
Whatever the reason, Null argues that a donor who cared most about social impact would always choose the charity with the highest matching grant.
She also devised a test to see if her subjects were willing to pay for information — a rough approximation of real-life donors demanding program results. In the final stage of the experiment, subjects were told they would have to pay $5 to know which charities had higher matching grants than others. About 40 percent took her up on the offer. For Null, that the majority of her subjects did not care which charity got the biggest match has a real-world corollary — most charities do not invest in costly program evaluations because donors do not demand them.
Her experiment boils the social value of real-life charities down to a lab game in which subjects are assumed to associate higher donations with better outcomes.
Still, she argues that donors' subjective responses prove that, as a group, they cannot be trusted to choose the most worthy charity. "I'm looking at how much people care about value of their gift," Null explained. "Few wanted to know which charity had a high matching rate. It's that disregard for efficiency that makes me concerned about giving too much control to a lot of little donors."
Null also raises questions about a small but growing portion of organizations that gives donors more direct connection to the projects they sponsor. On sites like Kiva, GlobalGiving and Donors Choose, people can donate to such causes as a clinic expansion in Rwanda, a llama herder in Peru or a classroom in inner city Chicago. For these organizations, the power of a personal relationship is key to growing donations, but Null sees a downside. "There is potential for these kinds of charities to become a beauty contest, where the donor's conception of what's useful doesn't match up with what an expert would say," she says.
Perhaps that is simply the cost of doing business with other people's money.
Fiona Ramsey is communications director for Kiva, which connects donors to entrepreneurs in the developing world. She's noticed that the entrepreneur's picture can make a big difference in drawing a loan. "A great smile, something that gives you a sense of their personality, brings in more money," she said. She also noted that entrepreneurs who do not correspond to the American conception of Third World poverty — an Eastern European taxi driver in a business suit — are funded more slowly than their African counterparts.
"You might call it the Angelina Jolie effect," she said.
Of course, small donors are not all subjective feeling and warm glow. Karlan and his colleague Michael Kremer at the nonprofit Innovations for Poverty Action recently conducted a field experiment in which donors were sent a letter detailing rigorous research about an organization they already supported, while others were simply sent stories about people affected by the organization. Those who received the scientific letter were more likely to donate, and in larger amounts.
In the end, a critical approach may not be at odds with warm glow — if anything, donors like to know that their charitable instincts had a quantifiable result.
"There are people out there who would seek out that information, but for many more a pretty photo is the most effective way of nudging them along to be charitable," said Karlan. "That's fine — not everyone is the same."
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