Saturday, July 23, 2011

This is your brain on charitable giving

In recent years, researchers have begun using brain science to study economic decision-making.  This combination of neuroscience and economics has spawned the new field of neuroeconomics.  Much work in this new field centers on the use of fMRI (functional magnetic resonance imaging).  The fMRI allows scientists to see which parts of the brain are working when subjects make economic decisions.  When some part of the brain kicks into gear, it uses oxygen.  The fMRI detects this depletion of oxygen.  In this way, the fMRI records which parts of the brain "light up" during a decision task.  By combining this with information about what different parts of the brain do, researchers can learn more about how people actually make decisions. 
Recently, Dr. Todd Hare, Dr. Colin Camerer, and others at Cal Tech applied these fMRI techniques to charitable giving decisions.  Previous research had shown that the VMPC (ventro medial prefrontal cortex) part of the brain lights up when people receive immediate rewards such as money or food.  The level of VMPC activation reflects the value (anticipated amount of enjoyment) received from the reward.  In the new experiment, participants made charitable giving decisions.  Just as with immediate rewards, VMPC activation reflected the enjoyment received from making a charitable gift.  When donors gave to organizations that they considered more worthy, they experienced higher VMPC activation.

Although the VMPC reflected the value of both immediate rewards and charitable donations, the mechanisms were different.  Two areas of the brain providing input to the VMPC were especially important for charitable gifts - the anterior insula and pSTC (posterior superior temporal cortex). These two regions have specific functions.  The anterior insula plays a role in empathy.  The pSTC is involved in shifting attention to focus on another’s perspective.
These neuroscience results suggest that the level of value placed on making a charitable gift may be the result of two items.  First, a donor must take the perspective of someone else – presumably the beneficiary.  Second, the donor must have empathy for that person’s situation.  If either of these two elements is missing, then the brain will not calculate a high value for making a charitable gift. 
People who can take someone else’s perspective, but who have no empathy for that person, will have no desire to help the person.  For example, people often take someone else’s perspective to guess what an opponent will do next.  But, this doesn’t suggest any empathy for the opponent.
Conversely, a person may have the potential for empathy, but lack the ability to take another’s perspective.  For example, a potentially empathetic donor may lack the life experience to understand the plight of a person in need.  Direct experience with the potential beneficiary’s circumstances could make it easier to put oneself in the other person’s shoes.

Much of the work of successful fundraisers focuses on encouraging these two behaviors – empathy and taking another person’s perspective.  This latest neuroscience study suggests that focusing on these two issues is not only common sense, but it actually corresponds with brain activity during a charitable giving decision.

Reference: The Journal of Neuroscience, 30(2), 583-590.

Investing in Younger Donors

How much sense does it make to spend time attracting young donors?  In terms of quick payoffs, younger donors leave a lot to be desired.  They have less income.  They have fewer assets.  They have student loans, childcare costs, and new mortgages.  These financial realities can make philanthropy a distant concern.  So, it is no surprise that younger donors rarely appear on major donors lists.

Yet, some argue that investing in young donors can payoff later.  Fundraisers who develop young donors may create a charitable habit that can persist throughout life.  Dr. Jonathan Meer of Texas A&M University presented results from his investigation of this question at the 2010 American Economic Association conference in Atlanta, Georgia.  Following over 8,000 alumni of a private university for up to 27 years, he explored whether or not giving when young created lifetime giving habits.

Measuring how giving when young affects giving when older is difficult.  It is easy to show that people who give when they are young also give when they are older.  (Indeed, in Dr. Meer’s results, those who were frequent donors soon after graduation were much more likely to still be donors 20 years later.)  But, this is not necessarily useful for the development officer.  This association doesn’t prove that generating gifts from the younger donor actually causes generosity in later years.  It may just reflect that that generous people are generous throughout their lives.

Dr. Meer’s study attempted to overcome this problem.  He investigated the impact of a fundraising “shock” to the normal pattern of giving.  Here the “shock” was whether the alumnus’ freshman-year roommate was a volunteer solicitor during the first five years after graduation.  About 23 percent of alumni were solicited by a former roommate during this time.  Previous studies have shown that being solicited by a former roommate dramatically increases the likelihood of making a gift to one’s alma mater.  By measuring the long-term effect of this one-time high-impact solicitation, the study was able to isolate the results of the fundraising activity itself.  The statistical results implied that frequent giving to the university when young - due to an outside fundraising “shock” - later resulted in giving about 6.5 times more money when older.  Thus, encouraging the giving habit in the first five years after graduation paid large dividends decades later.  Dr. Meer concludes, “… it seems evident that the pursuit of frequent gifts from young alumni, even if the university suffers a loss in the process, is justified.” 

Interestingly, these long-term effects were caused by the frequency of giving.  The amount of giving didn’t matter.  This makes sense if we think in terms of habit formation.  Making ten gifts of $100 may ingrain the giving habit far more than making a single gift of $1,200. 

This study provides unique evidence that charitable giving when young is habit forming.  The effects of giving when young appear to last well over 20 years and can ultimately result in substantial donations.  Investing in fundraising today can result in substantial gifts far into the future.

Charitable giving and childlessness

            The aging of the population is one of the most discussed trends in American demographics.  Less discussed, but just as striking, is a strong increase in childlessness among those nearing retirement age.  The U.S. Census reports that childlessness among women age 40-44 nearly doubled from 10.1% in 1980 to 19% in 2000.  When combined, these two trends predict a dramatic rise in childless older Americans.  How might this demographic shift affect philanthropy?  Several recent academic studies looked specifically at the issue of philanthropy among childless older adults.
Professor Frank Adloff of the Free University of Berlin studied childless donors in Germany.  As a group, childless people in Germany gave less to charitable organizations.  However, this may be due to the lower average age of those without children.  Marco Albertini of the University of Bologna and Martin Kohli of the European University Institute also looked at giving by childless individuals.  Their study of ten European nations found that the difference in current giving among childless individuals disappeared when looking only those over age 50.

Further, specific forms of philanthropy were much more common among older childless donors.  For example, Professor Adloff noted that people who established private foundations were more than 3 times as likely to be childless as the general population.  The desire to provide something permanent to future generations was particularly compelling for these donors.   Childless donors were significantly more likely to list “giving to posterity” as an important motivator for establishing their private foundation.

            U.S. studies have shown a similar tendency for childless donors to make charitable estate gifts.  This is not surprising.  Children and grandchildren are natural recipients of bequests.  In their absence, other beneficiaries – such as nonprofit organizations – may become more attractive.

            In a nationally representative study of those over age 50 in the U.S., childless people were more than four times as likely to report having a charitable estate plan (19.1% v. 4.1%).  Further, childless individuals reporting a charitable estate plan were more likely than those with children to actually generate a charitable transfer after death.  In a related national study, Russell James (Texas Tech University), Mitzi Lauderdale (Texas Tech University), and Cliff Robb (University of Alabama) tracked changes in the propensity to make charitable estate plans from 1996 to 2006.  During this time, the likelihood of reporting a charitable estate plan increased from 3.86% to 5.46% for those aged 55-64.  This represents a significant increase in charitable estate planning within this age group.  The researchers found that increased childlessness was the main factor behind the change.  In other words, the main reason why charitable estate planning increased from 1996 to 2006 was the increasing proportion of childless people within the age group. 

            These research findings all point to future growth in charitable estate planning.  The increase in the size of the older population should drive much of this growth.  But, due to increased childlessness, charitable estate planning should grow even faster than the population of older adults.

References: Ageing & Society (2009) 29, 1185–1205 & 1261-1274; Journal of Financial Counseling and Planning, (2009), 20, 3-14;

Income and Giving

            Having more income makes people more likely to give more money to charity.  That is no surprise.  However, Professors Patricia Hughes and William Luksetich from St. Cloud State University recently found that the kind of income, and which spouse earns the income, also makes a difference.  Their study followed 2,041 continuously married couples in the Panel Study on Income Dynamics from 1994 to 2001.

            Unlike some other studies, Hughes and Luksetich went beyond comparing current year giving with current income.  Instead, they also looked at the average income in the six prior years prior.  They found that average income over the six prior years was a better predictor of giving than income in the current year.  In other words, the level of income during the current year had less effect on giving than the long-term average income did.  Couples tended to make donation decisions based on normal income levels, rather than on current year spikes or drops in income.  This suggests that donors may give a smaller share from temporary income increases, like a one-time bonus, than from permanent income increases.   

            Not only was average income important, but so was the spouse who earned the income.  Giving was much more responsive to changes in the husband’s average income than to changes in the wife’s average income.  Although giving still increased as the wife’s average income rose, it did not increase by nearly as much as when the husband’s average income rose. 

            The study also examined the effects of income volatility.  (High volatility means that the income fluctuated a lot during the six-year period.)  The effects of income volatility on charitable giving also depended on which spouse’s income was volatile.  When the wife’s income was more volatile, giving was lower.  When the husband’s income was more volatile, giving was higher.  The negative effect of the wife’s income volatility was particularly strong for religious giving. 

One possible explanation for the different results is that the wife’s income volatility may come from the wife leaving the workforce due to the birth of a child.  Because the child increases family expenses, little money may be available for charity.  The later re-entry of the wife into the workforce would also generate income volatility.  But, this re-entry may come during the life stage when much of the additional income is set aside for retirement savings.  In such a case, couples might delay giving until they are actually using the income during retirement. 

(Nonprofit and Voluntary Sector Quarterly, Vol. 37, pp. 264-280)

Understanding African-American Donors

Ethnic market analysis is nothing new for most marketers.  Professor David Van Slyke at Syracuse University and researchers at Georgia State University applied this to fundraising by analyzing African-American donors.  African-Americans give well over $7 billion per year.  Historically, African-American philanthropy was centered on churches.  Today that philanthropy extends to every kind of charity.  

This research project used surveys from about 5,000 people in the Atlanta area.  Although African-Americans were less likely to give than whites were, this was simply a consequence of economic circumstances.  At higher levels of education, income, and age, there were no significant differences in charitable giving levels between African-Americans and whites.  Among African-Americans, the likelihood of giving increased with income, education, and frequency of church attendance.  The same was also true for the likelihood of volunteering. 

            Researchers also asked about the potential effectiveness of different donor incentives.  The most influential were, (1) receiving information on how the gift will be used, (2) ability to advance career/profession, (3) organizational membership, (4) discounts at the charity, (5) discounts in the community, and (6) free gifts from the organization.  The ability to advance one’s career was a relatively more influential benefit for African-Americans than whites.

            The survey also asked respondents to rate the effectives of different fundraising methods.  African-Americans rated the most effective techniques as, (1) request of a friend or relative, (2) appeal related to a television or newspaper story, (3) appeal by a community leader or celebrity, (4) mail, (5) telethon, (6) someone at the door, and (7) telephone call.  A request on a website rated as least effective.  The order of these ratings for was the same for whites. 

Although the order was the same, African-Americans rated themselves more likely to respond to each of the techniques than did whites.  Yet, African-Americans did not actually give more.  What causes this discrepancy?  The researchers suggested two possibilities.  African-Americans may have reported themselves to be more receptive than they actually were.  Or, they may just be asked less frequently.  The researchers pointed to evidence of a lack of solicitation from previous findings.  Past research described fundraisers “skipping” black neighborhoods, unwilling to learn of donor interests and preferences in these communities.  This combination of findings suggests that African-Americans may be a relatively untapped market segment.  Although already giving substantially, this group may hold even greater potential for philanthropy.

(Citation: The American Review of Public Administration, Vol. 37, pp. 278-304)

Do the poor give more?

            As a group, Americans are among the most generous.  But, this generosity is not spread evenly throughout the population.  One particularly interesting, and disputed, phenomenon is the “U-shaped” income-giving profile.  This refers to the tendency for those with the lowest and highest incomes to give more of their income to charity.  Drs. Russell James from the Texas Tech University and Deanna Sharpe from the University of Missouri investigated this phenomenon and its causes using expenditure data from 16,422 households.  The data showed that, indeed, the share of income given to charity was highest among those making less than $10,000.  With each additional $10,000 in income, the share given dropped.  This percentage was lowest for those with incomes between $50,000 and $100,000.  Above $100,000, however, the share of income given to charity increased with additional income.  This U-shaped phenomenon occurred in both religious and non-religious giving. 

Previous findings published in the 1990s had challenged the existence of the U-shaped relationship.  However, when this earlier data was reexamined, the challenges turned out to be unfounded.  (The U-shaped relationship disappeared only if researchers intentionally omitted a large set of the households.)

So does this mean that the poor are generous, while the middle class are stingy?  Not exactly.  Two factors prevent this interpretation.  First, the U-shape does not reflect typical behavior.  The proportion of households giving anything to charity is lowest among those with the lowest income.  As income goes up, more households give to charity.  It turns out that the U-shape is caused entirely by the few households that give at least 10% of their income.  The unequal distribution of these highly committed donors creates the U-shape.  Second, these highly committed donors often turn out not to be poor at all.  In fact, low-income donors who give at least 10% of their income have more than six times the liquid assets of others at their income level.  Who are these low-income, high-asset donors?  Typically, they are retirement-aged individuals giving a large share of income, but a small share of liquid assets.  So, although the U-shaped income-giving relationship does exist, it turns out to be caused largely by wealthier donors with lower incomes, rather than by the truly poor.

(Citation: Nonprofit and Voluntary Sector Quarterly, Vol. 36, pp. 218-238.)

Recognition and reward: When the two don’t mix

What motivates donors?  No doubt, this can vary from donor to donor.  But, professors at Duke, Columbia, and Tel Aviv Universities ran experiments to explore two particular kinds of donor motivations, extrinsic motivation and image motivation.  Extrinsic motivation can arise when donors receive a reward or benefit from donating.  These rewards can include tax breaks, tickets, auction items, or gifts.  Image motivation is based on how others will perceive the donor’s actions.  For example, some donations might signal the donor’s philanthropic spirit or wealth.

To test these two motives, professors Dan Ariely, Anat Bracha, and Stephen Meier conducted an experiment with college students at Princeton.  The students participated in “Click for Charity” where they could earn money for a charity by repeatedly pressing particular keys on a keyboard.  The more effort students spent on the task, the more money they raised for the charity.  Some students were assigned to the “public” group.  In the “public” group, students had to share their results with each other at the end of the experiment.  Other students were in the “private” group, where results would not be shared with others.  Not surprisingly, those in the public group gave more effort and, ultimately, raised more money for charity.  This, the researchers’ believed, resulted from image motivation.  Only those in the “public” group had an audience for their actions, and could thus be motivated by the perceptions of others.

But, the experiment did not stop there.  Some students in both groups were also given money incentives.  These students raised money for charity, but they were also paid an amount identical to whatever they had raised for charity.  The compensated students in the “private” group gave more effort than the non-compensated students in the “private” group.  This makes perfect sense.  Although the “private” group had no image motivation, the compensated members had an extrinsic motivation.

  The results, however, were very different for the “public” group.  The compensated students in the “public” group actually gave less effort than did the non-compensated students in the “public” group.  In fact, among the compensated students, the effort levels were the same regardless of whether the students were in the “public” or “private” group.

Why the difference?  The researchers believe that introducing compensation (extrinsic motivation) reduced the image motivation for the “public” group members.  The non-compensated “public” group students knew that others would see their selfless efforts.  But, the compensated students’ efforts could be interpreted as either philanthropic or selfish.  (Compensated “public” group members had to report to others both how much they raised and how much money they received.)    To verify these results, the researchers ran a similar experiment, this time in the MIT gym, where students could “bike for charity.”  As before, adding compensation increased the efforts for the “private” group, but slightly reduced efforts in the “public” group.

How might fundraisers use these results?  While extrinsic benefits like rewards, tickets, or gifts can be useful, it may make more sense to focus these benefits on private activities.  Giving these kinds of extrinsic benefits for visible pro-social activities (such as volunteering) may be counter-productive and actually reduce participation.

Citation: American Economic Review, volume 99, pp. 544-555.