INVESTING IN GOOD DEEDS WITHOUT CHECKING THE PROSPECTUS
June 15, 2006
Some donors to charities, it seems, do not behave rationally. Increasing evidence shows that donors often tolerate high administrative costs, fail to monitor charities and do not insist on measurable results -- the opposite of how they act when they invest in the stock market, says Tyler Cowen, a professor of economics at George Mason University.
John A. List, an economist at the University of Chicago, is studying fund-raising campaigns. His research implies that most donors do not respond when they have opportunities to be more effective in their giving. For instance:
- It is well known that a "matching pledge" -- if one donor gives a dollar, some other donor pledges to give a dollar more -- increases charitable contributions.
- Donors are enticed by the idea of "more bang for the buck," yet List finds that the size of the match does not seem to matter.
- When the pledge is for $2 or even $3 to match an outside dollar, donors do not, in the aggregate, give more money.
Professor List's work more generally suggests that people become rational in their spending only through the repeated experience of trading in markets:
- This trial-and-error process, with the accompanying feedback, is absent when people give money to a distant charity.
- Once the money is gone, donors do not personally bear direct costs from bad charitable decisions. Nor is it easy to learn what went wrong.
List has yet to delve into the specifics of donor motives, but the obvious conclusion is that donors do not behave like customers, says Cowen. Customers take great care to learn about the merits of different expenditures, on cars or on homes, for example.
Source: Tyler Cowen, "Investing in Good Deeds Without Checking the Prospectus," New York Times, June 15, 2006; based upon: John A. List and Dean Karlan, "Does Price Matter in Charitable Giving?" Social Science Research Network, April 10, 2006.
For study abstract:
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