June 15, 2006/New York TIMES
Economic Scene
Investing in Good Deeds Without Checking the Prospectus
By TYLER COWEN
Tyler Cowen is a professor of economics at George Mason University and
is a co-author of a blog, www.marginalrevolution.com. He can be
reached at [EMAIL PROTECTED]
DONORS to charities, it seems, do not behave rationally. Increasing
evidence shows that donors often tolerate high administrative costs,
fail to monitor charities and do not insist on measurable results —
the opposite of how they act when they invest in the stock market.
The charitable sector now represents more than 2 percent of gross
domestic product in the United States. So, improvements could bring
significant value to American higher education, religion and the arts,
which have come to rely on donations.
But before we can improve our charity, we must first understand it.
John A. List, an economist at the University of Chicago, is studying
fund-raising campaigns toward this end. Professor List, combining his
career as a researcher with a role as part-time consultant, introduces
variations into real world fund-raising campaigns and studies the
results. This reflects his core method of the "field experiment,"
which he has applied to topics as diverse as competition between the
genders, how contestants cooperate on television game shows and how
markets work in baseball card trading. Steven D. Levitt, co-author of
"Freakonomics" and a colleague at the University of Chicago, refers to
Professor List as the young economist most likely to win a Nobel
Prize.
[This, of course, is one reason why the University of Chicago has so
powerful an economics department. One guy Leavitt hypes another, while
Cowen hypes them both, in a reinforcing spiral. This doesn't seem to
be an example of the "individual rationality" that the U of C and
George Mason U stress so much. It's more a matter of group-think]
Professor List's research implies that most donors do not respond when
they have opportunities to be more effective in their giving. For
instance, it is well known that a "matching pledge" — if one donor
gives a dollar, some other donor pledges to give a dollar more —
increases charitable contributions. Donors are enticed by the idea of
"more bang for the buck." Yet Professor List finds ("Does Price Matter
in Charitable Giving?", co-written with Dean Karlan, an economics
professor at Yale University,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=903817) that the
size of the match does not seem to matter. When the pledge is for $2
or even $3 to match an outside dollar, donors do not, in the
aggregate, give more money.
Professor List's work more generally suggests that people become
rational in their spending only through the repeated experience of
trading in markets. This trial-and-error process, with the
accompanying feedback, is absent when people give money to a distant
charity. Once the money is gone, donors do not personally bear direct
costs from bad charitable decisions. Nor is it easy to learn what went
wrong.
Professor List has yet to delve into the specifics of donor motives,
but the obvious conclusion is that donors do not behave like
customers. Customers take great care to learn about the merits of
different expenditures, on cars or on homes, for example.
But donors often give to charities for reasons of pride. Monitoring a
charity means worrying about the wisdom of contributing to that
charity. Many donors would instead prefer simply to feel good about
their generosity and thus they deceive themselves into thinking that
all is going well. Furthermore, many donors seek a sense of
affiliation and wish to be a part of large and successful
organizations — the "winning team," so to speak. Again, these donors
do not focus on how, or if, they actually end up improving the world.
If donors are not looking at results, they may end up choosing
charities on the basis of extraneous qualities. Professor List
conducted another experiment ("Toward an Understanding of the
Economics of Charity" (http://www.nber.org/papers/w11611.pdf), with
Craig Landry, Andreas Lange, Michael K. Price and Nicholas G. Rupp) on
charitable giving. He and his research team ran a door-to-door
fund-raising trial, using a variety of methods, across nearly 5,000
households. The team then measured the difference between the most
effective fund-raising method (selling lottery tickets) and the least
effective method (just asking for money).
For purposes of contrast, Professor List and his team then increased
the attractiveness of the woman who asked for the money. The more
attractive women (a "one standard deviation increase in
attractiveness," in statistical terms) had as big a positive impact on
giving — in the range of 50 to 100 percent — as moving from the least
successful fund-raising method to the most successful.
The philanthropic sector is showing a growing awareness of these sorts
of institutional failures, so initiatives are under way to improve
their performance. The Robin Hood Foundation in New York City pledges
that its board will cover all overhead expenses; remaining donations
go to antipoverty programs. The charity College Summit raised $15
million by going to Wall Street with a plan for growth and
fund-raising, much as a venture capitalist might do. Geneva Global
encourages donors to think of themselves as investors; it measures and
reports results for each of its programs.
It remains to be seen which particular innovations will stick or
spread, but well-informed and self-critical donors are probably a key
to improvement for nonprofit organizations. If donors do not abandon
failing causes, those efforts will continue. Perhaps the content of
donor pride needs to change. Rather than taking pride only in their
generosity, donors should also take pride in their willingness to
confront unpleasant news. Many individual donors are reluctant to take
such steps, but the result would be better charities and greater real
generosity all around.
--
Jim Devine / "Advocates of capitalism are very apt to appeal to the
sacred principles of liberty, which are embodied in one maxim: The
fortunate must not be restrained in the exercise of tyranny over the
unfortunate." -- Bertrand Russell
