Hacking Human Nature How behavioral economics informs fundraising success Thomas P. Lockerby, Phillips Academy Planned Giving Council of NH & VT June 1, 2017
Inspirations
Agenda ✤ Basic principles ✤ A quick romp through economic history ✤ Rise of behavioral economics ✤ Economics turns to fundraising ✤ Wrap
Laws of Supply and Demand P D S Does economics govern philanthropy? P* Q* Q
18th Century: Birth of Economics ✤ Adam Smith, 1723-1790 ✤ The Wealth of Nations, 1776; The Theory of Moral Sentiments, 1759 ✤ Division of labor [WoN] ✤ “Invisible hand” [WoN] ✤ Mutual sympathy of sentiments [TMS] Smith
19th Century: From Malthus to Marx ✤ Thomas Malthus, 1766-1834 Karl Marx, 1818-1883 ✤ The Principle of Population, 1798 (Malthus); Das Kapital , 1867 (Marx) Malthus ✤ Arithmetic increase in food/geometric increase in population: scarcity [PoP] ✤ Capitalism leads to the alienation of labor (proletariat) at the hands of the wealth-holders (bourgeoisie) [DK] Marx
20th Century: Cambridge Circus to the Chicago School ✤ John Maynard Keynes, 1883-1946 Milton Friedman, 1912-2006 ✤ General Theory of Employment, Interest, and Money , 1936 (Keynes); Keynes A Theory of the Consumption Function , 1957 (Friedman) ✤ Propensity to consume [GT] ✤ Permanent income hypothesis [CF] Friedman
Human Nature: Behavioral Economics ✤ Daniel Kahneman, 1934- Amos Tversky, 1937-1996 ✤ “Judgement under uncertainty” ( Science , 1974); “The framing of decisions and the Kahneman psychology of choice” ( Science , 1991) ✤ Errors arising from heuristics and biases ✤ Prospect theory Tversky
Human Nature: Behavioral Economics ✤ Richard Thaler, 1945- ✤ Quasi Rational Economics, 1994; The Winner’s Curse , 1992; The Big Short (cameo), 2015 Thaler ✤ The limits of rationality in economic decisions ✤ Nudges as economic tools
The Hack: Philanthropic Economics ✤ James Andreoni, 1959- Dean Karlan, 1968- Andreoni John List, 1968- ✤ “ Toward a Theory of Charitable Fundraising,” Journal of Political Karlan Economy, 1998 (Andreoni); “Does Price Matter in Charitable Giving?” American Economic List Review, 2007 (Karlan and List)
What does economics tell us about philanthropy?
The Philanthropic Economists Ask: Why do people make charitable gifts? Altruism theory People give because collective philanthropy maximizes the public good. Warm-glow theory People give because they get something of personal value from the act, over and above the collective social benefit.
The Philanthropic Economists Ask: Do matching gifts work? Yes, but . . . Larger matches (3:1 or 4:1 vs 1:1) seem to have little extra effect. Limited reciprocity and commitment effects Donors respond to matches because of the desire to align their behavior with others but these behaviors are not substantially affected by the scale of the match.
The Philanthropic Economists Ask: Should campaigns start at $0? No Multiple studies show that both the number of donors and the average size of gifts increased as a result of early leadership donor support. Threshold and credibility effects Donors respond to initiatives that have already achieved a level of success.
The Philanthropic Economists Ask: What is the best appeal to increase bequest intentions? Include reference to others who have already done so. “Nudge unit” in Britain worked with the Remember a Charity organization to test simple message variants.
The Philanthropic Economists Ask: What is the best appeal to increase bequest intentions? Include reference to others who have already done so. “Nudge unit” in Britain worked with the Remember a Charity organization to test simple message variants. Social norming Donors respond to initiatives that have already achieved a level of success.
Wrapping Up ✤ The philanthropic sector is worthy of economic study—so that we can understand our work and perform at our best. ✤ Understanding donor behavior is the critical factor. ✤ Behavioral economics has much to tell us about the intersection of human nature and economic decisions. ✤ There are many experts whose work is accessible to the lay person. ✤ If nothing else, this is great cocktail party fodder!
Thank You
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