Why Overheads Go Over Our Heads

‘Overhead’ is commonly marred as a dirty word in the nonprofit industry. It is consistently perceived as a gluttonous money monster that drains resources from the otherwise noble mission. As Dan Pallotta mentions in his popular TED talk, “Charitable giving has been stuck at 2% of gross domestic product [in the US] since the 1970s. In 40-plus years, the nonprofit sector has not been able to wrestle market share from the for-profit world.”

Donors’ aversion to overheads, including non-programmatic costs that cover administration, significantly impedes contributions charitably. As Pallotta points out, we complain about getting two pieces of mail in a short period of time from a charity, yet we rarely fret after getting three full catalogues from Pottery Barn. Similarly, we think it is unconscionable for the Breast Cancer Foundation to spend $25 M in marketing, yet few bat an eye after hearing that L’Oreal spent $1.5 B to sell products to the same women.

Our puzzling and disproportionate negative reaction to this inconvenient truth can be explained by a powerful unconscious bias. In this article, solutions sourced from behavioral insights are offered.

Evaluability Bias

The data reveals a negative correlation between the amount donated and the amount that organizations spend, suggesting that donors are sensitive to the management of collected funds (Tinkleman & Mankaney, 2007). From a purely rational perspective, donors should be most interested in efficiency. They should compare different charitable options that produce the same good and then choose the one that delivers optimal quality at the lowest price.

The actual decision-making process fails to coincide with this criteria as donors are typically unaware of the quality and the price of the goods. Researchers suggest that without clear information on cost-effectiveness, donors tend to rely on the evaluability bias to make a decision (Caviola, et al., 2014). In one study, 94 participants were presented with two possible charities. The two experimental conditions included a joint-evaluation group (participants were presented with both Charity A and Charity B enabling comparison) and a separate-evaluation group (participants were presented either with Charity A or Charity B).

Charity A spent $600 on administrative costs and saved 5 lives

Charity B spent $50 on administrative costs and saved 2 lives