Why Overheads Go Over Our Heads

Table 1. Charity options in Study 1

Results suggested that participants donated significantly more to Charity B compared to Charity A in the separate-evaluation condition. Interestingly, these preferences reversed in the joint-evaluation condition as participants donated more to Charity A (the more cost-effective option). This suggests that donors are clearly making suboptimal choices when left without a point of comparison. The researchers explain that this is not a deliberative process. Instead, Caviola, et al. (2014) argue that donors primarily value cost-effectiveness but manifest evaluability bias in cases where they find it difficult to make evaluations.

Our aversion to overhead spending is problematic as it negatively impacts charities’ ability to initiate fundraising campaigns, support their infrastructure, or invest in  future planning. This pressure often leads charities to underreport costs, which broadens the information-gap (Pollak, 2004). To fill this gap, some effective-altruism based charity evaluators like Givewell use an in-depth scientific approach to rank charities by using metrics based on cost-effectiveness (e.g., cost-per-lives-saved). Such websites take all the guesswork out of the decision-making process.

It is important to note, though, that increased information availability does not always result in behavioral change. In the next section, three nudges that effectively reframe fundraising solicitations are outlined.

In an experiment that mailed letters asking participants to fund a capital campaign at the University of Central Florida (n = 3,000), donation amounts increased six fold and became twice as likely when solicitations described that a lead donor had covered a portion of running costs. This effect occurred when the seed donation, or the initial money allocated to funding the project,  was described as having increased from 10% to 67% (List & Lucking-Reiley, 2002). This finding suggests that donors’ contributions increase as the amount of seed money increases. Interestingly, the researchers explain that beyond a critical level of seed money, contributions start to decrease. Taking this insight into consideration should help nonprofits in finding the optimal amount of seed money.

In a large-scale field experiment, researchers sent direct mail solicitations to donors who were unfamiliar to the charity (n = 61,483). In one group, donors were informed that their contributions would be matched by the Bill & Melinda Gates Foundation (BMGF), and a second group was told that contributions would be matched by an anonymous group. Results suggested that those who knew BMGF were 26% more likely to donate and donated 51% more on average (Karlan and List 2014). Donors reportedly trusted the BMGF foundation and felt comfortable enough to contribute. Matching employs the powers of social referencing. In the absence of information, donors tend to base judgements on the decisions of other societal members and authority figures. In this case, donors are likely assuming that BMGF has exercised their due diligence as they would not have otherwise agreed to match contributions.

In a recent field study, researchers sent out direct mail solicitations from Smile Train, a non-profit that treats children with cleft palates. The first group received a conventional invitation letter and a second group received “once and done” solicitations. In the second group, participants were given the option to check “never receive any other mail requests”. Results showed an initial response rate of 0.34% for the control group with a total revenue of $178,609. The “once and done” group had a higher initial response rate of 0.66% with a higher total revenue of $260,783. Most surprisingly, the “once and done” group gave more future donations than the control group. This is especially interesting as the control group did not have the option to opt-out of future mail solicitations (Mullaney et al., 2015).

Taken together, these nudges are reassuring donors when they have insufficient information for optimal decision-making. These nudges are designed to leverage our natural tendency to engage in social referencing. When we are told that a lead donor has covered running costs, or agreed to match contributions, we automatically assume that the charity has been vetted. This process assigns credibility, which makes us gain trust and comfort in our decision to donate.