Creating ‘Markets for Good’ No Simple Exercise

Behavioural economics continues to provide fascinating insights about what drives charitable giving and shows us how it’s even more complex than we may think, writes Philanthropy Australia’s Policy and Research Manager Krystian Seibert.

The Initiative’s goal was that by 2015, 10 per cent of individual philanthropic donations in the US (or $US20 billion) would be influenced by meaningful, high quality information about the performance of Not for Profits.

As part of its strategy, it provided funding to charity evaluators or ‘charity watchdogs’ as they are sometimes referred to, including ‘Charity Navigator’, ‘GiveWell’ and ‘Guidestar’.

The decision demonstrates the Hewlett Foundation’s commitment to evaluating its own programs and being open about their outcomes.

However it also highlights the challenges associated with applying conventional economic theories of behaviour to charitable giving.

This involves assuming that, in large part, altruistic behaviour such as charitable giving is based on similar motivations and drivers as other economic decisions such as purchasing goods or investing in the stock market.

Consequently, the argument that flows is that Not for Profits need to provide more information about their finances and performance, it needs to be appropriately presented and made accessible to donors, and then donors need to use it to compare Not for Profits and make decisions based on these comparisons.

By creating the equivalent of ‘stock markets for good causes’, the idea is that this will support more effective ‘markets for good’ so to speak.

But the Hewlett Foundation’s own evaluation shows just how difficult creating such markets for good can be.

Research called Money for Good undertaken in 2010 found that only three per cent of individual donors compare information about relative performance when deciding which organisation to support.

It also found that the majority of donors make giving decisions based on things like loyalty, personal connections, and faith-based commitments.

The Hewlett Foundation’s evaluation of the Nonprofit Marketplace Initiative found that their support had not had much success in changing these patterns, and that’s a key reason they are winding the Initiative down.

Studies looking at the effectiveness of charity evaluators also back up these findings and show just how hard it is to change donor behaviour in the way the Initiative sought to do.

A 2013 paper which examined how donors respond to ratings of charities such as those provided by Charity Navigator found that in general they have a minor and often insignificant impact on charitable donations received by charities. Another paper from 2010 found that changes in charity ratings tend not to affect donor support for Not for Profits.

A further important take out from these two papers is that they highlight the clear limitations of using charity evaluators as a form of ‘information-based regulation’, and as an alternative to ‘state-led regulation’ – something recently recommended in Australia.

Many people will agree that simplistic measures based on fundraising ratios and levels of overhead are not adequate indicators of performance and that there needs to be more emphasis on the impact of what charities do.

But once again, a new study shows us that responses to information about impact and effectiveness are not what one would necessarily predict – evidence of impact doesn’t always lead to more donations.

Researchers collaborated with the Californian charity Freedom from Hunger to conduct two rounds of direct-mail marketing to its prior donors, asking them to make another donation.

All of the letters included an ‘emotional’ story about how Freedom from Hunger benefited an individual. Some appeals also included scientific data on the impact and effectiveness of the charity’s work.

The study found that donors who had previously donated more than $100 were more likely to give more when they were provided with data on the charity’s impact. However, donors who had donated less than $100 were actually less likely to donate when the appeal included the data!

Overall, the responses from both groups averaged out, so the total level of donations did not decrease.

So where does this leave us?

The findings in these various studies will not come as a shock to many – when it comes to charitable giving, you can’t just assume that the standard Home Economicus models will work. It’s much more complex than that.

Some donors will pay more attention to performance and effectiveness, some may not – but donors will also think about performance and effectiveness in different ways.

Donor’s decisions will be based on a variety of factors such as a connection with a certain cause, or a relationship with a particular charity. A diverse range of behavioural factors and influences are at play.

It doesn’t mean that we shouldn’t encourage more information provision about charities – research undertaken for Philanthropy Australia shows there is demand for it. But at the same time we shouldn’t overplay its impact in terms of influencing charitable giving.

The Not for Profit sector is different to the for-profit sector in many ways, but there is a key similarity – the field of behavioural economics is teaching us a lot about how complex our decision making processes are, and that conventional economic models leave much to be desired.

In the case of philanthropy, behavioural economics will continue to provide fascinating insights about what drives charitable giving and show us how it’s even more complex than we may think.

About the Author: Krystian Seibert is a regular monthly columnist for Pro Bono Australia on philanthropy, public policy and research. He is the Policy and Research Manager with Philanthropy Australia and tweets at @KSeibertAu