A representative from a charitable organization stops you on the sidewalk and asks for $100 to feed people starving in the developing world. And a large donor has agreed to match your donation. Still, you hesitate, because you wonder how much of that money will be sucked up by the salary of the charity's CEO or the costs of yet more fundraising. "Don't worry," the rep tells you, "all of those overhead costs are paid for by another donor: So 100% of your money will help the hungry." It may seem to be nothing more than an accounting trick—after all, the charity's budget and operation hasn't changed—but you will now be almost twice as likely to donate and willing to give 75% more money, according to a new study. It is yet more evidence that classic economic theory is wrong about how people make decisions.
There's no such thing as a free lunch, even for charities. Even the most efficient organization must use at least a tiny portion of its income to cover administration costs. For example, the American Red Cross spends 10% of its $3 billion in revenue on administration and fundraising. Its nonmission spending has been controversial, but other charities have even larger overheads. To improve the health of mothers and babies, for example, March of Dimes spends 33% of its $200 million budget on administration and fundraising. Should people only donate their money to charities with the lowest overhead ratios?
According to current theory, "basing donation decisions on overhead is wrong," says Uri Gneezy, an economist at the Rady School of Management at the University of California (UC), San Diego. Some charitable missions may simply be more expensive to administer. And if a particular mission—taking care of the poor children in your city—is what you really care about, then you should base your decision on efficacy, not efficiency.
But that reasoning is based on the assumption that people make their decisions like Star Trek's supremely rational Vulcans. "Mr. Spock [donates] just because he cares about the outcome for the child," Gneezy says, but this assumption is "a mistake" because it ignores the main motivation for giving: "It makes us feel good." Anything that reduces that good feeling will lower the likelihood of a donation. And one of the biggest turnoffs is the perception that donations are being leeched by an organization, which economists call overhead aversion.
A charity can't make its overhead costs completely disappear, but there is a way to make it appear to be zero from the perspective of an individual donor: First convince a big donor to cover the charity's overhead costs, and then everyone else can be told that 100% of their donations will go directly to the mission. Based on the psychology of decision-making, Gneezy reasoned, that should boost donations by eliminating people's overhead aversion.
Gneezy and colleagues started with a laboratory experiment. They recruited 449 undergraduate students and gave each of them a choice of donating $100 to one of two real but little-known charities: Kids Korps USA, “a nonprofit organization that engages young people in volunteerism and teaches them about leadership and civic responsibility,” or charity: water, “a nonprofit organization that brings clean and safe drinking water to people in developing nations.”
The donation information provided to help the subjects make their decisions varied. In some cases, a donation to one charity was part of a fund drive where the donation would be matched by a committed donor, either in a 1-1 ratio or a 3-1 ratio. In other cases, the donation would just be added to a "seed fund" that was already committed. And to test the overhead aversion hypothesis, sometimes a donation to a charity would come with the promise that 100% of the money would go to the cause, because the overhead was already covered by another donor.
Removing the overhead made a big difference. When subjects were told that all of their donation would go directly to the cause, they were 80% more likely to donate to a charity compared with the same charity with a seed fund, and 94% more likely compared with matching donations, the team reports this week in Science. Surprisingly, the rate of donation was the same when the donations were matched either 1-to-1 or 3-to-1.
Then the team did a real-world experiment. Last year, an unnamed educational charity mailed out a request for donations to 40,000 people divided evenly into four treatment groups: overhead-free, matching funds, seed fund, and a control group with no special terms. They were asked to give any amount they could, but were encouraged to give between $20 and $100. Sure enough, removing overhead boosted total donations 64%, yielding $13,220 compared with $8040 from the control group.
"This is a very clever study with obvious real-world implications," says Daniel Oppenheimer, a psychologist at UC Los Angeles. Overhead aversion has long been known to be powerful, he says, even causing "people to prefer to give to charities with lower overhead that help fewer people than charities with higher overhead that actually do more good." But a practical challenge will be to find donors willing to cover the overhead, because "large donors don't like overhead any more than other donors."
So should all charities try to switch to this strategy? Some who study charitable giving hope not. "Overheads are already a bad way to assess a charity," says Toby Ord, a philosopher at the University of Oxford in the United Kingdom and the co-founder of the evidence-based charity ranker Giving What We Can. "So this takes a bad metric and either nullifies it or exploits it, depending on how you look at it." Rather than using a "trick" to make a donor think they are more efficient, Ord says, charities should focus on improving their efficacy.
But Gneezy contends that no one is being tricked. Even knowing that overhead should not be an important factor in a donation decision, "I feel the same as our subjects do. … What I find nice about our solution is that it is a simple change in the name of the gift that makes us so happy about it—even when we are fully aware of this. It’s not a ‘trick’ or ‘nudge’ or ‘irrational’—it is a different feeling that we get from our donations."