How to Reduce the ‘Cost’ of Philanthropy So Major Donors Give More

Dr. Russell James

April 18, 2022

Teen Talk Barbie famously stated, “Math is hard.”[1] This may be particularly true in fundraising. Giving is motivated by social emotion. Triggering math, logic, error-detection thoughts can hurt. It can block social emotion.

But we can’t simply ignore math. Why not? Because giving doesn’t come just from motivation. It comes from the intersection of motivation and cost. Motivation must overcome the cost barrier. So, we can’t ignore cost. And cost is a number.

Or is it? In traditional economics, cost was just a number. It was part of a rational math equation. But then behavioral economics added experiments. It found that cost was not just a number. Cost was also a feeling. The same number could feel larger or smaller, depending on circumstances.

Making cost feel small
Giving results from the intersection of motivation and cost. If the cost feels smaller, a gift is more likely. How can we make cost feel small? One way is by subtraction.

Subtraction lowers the total cost. This can be objective. For example, tax benefits can do this. But it can also be subjective. Even with the same number, the feeling of cost can become lower. This can happen when the cost is compared with different reference points. It can happen when the cost comes from different sources.

Objective subtraction: Tax benefits
Lowering the real cost of a gift can help. Objective discounts like tax benefits make bigger gifts possible. They increase donations.

Even so, the power of math still depends on the story. In math, a rebate and a match are identical.

Match: The donor gives $1. It’s matched with $1.

Result: The gift makes a $2 impact but costs the donor only $1.

Rebate: The donor gives $2. The donor is paid $1 for making the gift.

Result: The gift makes a $2 impact but costs the donor only $1.

The math result is the same. But the feeling is different.  The feeling is different because the story is different.[2]

• A match is a story of greater impact (donor heroism). The donor uses a special tool to win a greater victory for the story characters. This improves the donor’s story.[3]
• A rebate is a story of greater personal benefit (donor selfishness). The donor makes a gift. Plus, he gets some personal financial benefit. This weakens the donor’s story.

In fundraising experiments, a match works better than an identical rebate.[4] And we see this in fundraising practice. Everyone offers matches. No one offers rebates. Problem solved, right? Not exactly.

Unfortunately, the biggest money benefit that a donor gets is a rebate. A tax deduction is a rebate. The donor makes a gift and then gets a tax benefit.

We can’t change this. But rebates don’t work as well in a story. So, it makes sense to change the words we use to describe tax benefits. We want to use words that frame the tax benefit as if it were a match.

• Match language – Yes

“You give and the government matches your gift with a tax benefit. Your dollars become more powerful because the government pays for part of the cost of the gift.”

• Rebate language – No

“You give and you get a tax benefit back in return. Giving this way means that the charity benefits and so do you.”

The math is the same. But the language changes the story.

Objective subtraction: Charity benefits
In math, a charity could lower cost by giving something back. In story, this is tricky. Getting back cash from a charity can ruin the story. In experiments, cash payments can reduce helping or volunteering.[5]

It’s not that a charity can’t benefit a donor. It’s that the donor’s benefit must create little or no extra cost for the charity. The best story is a gift that helps the charity 100%. If the donor’s benefit doesn’t cost the charity anything extra, that story stays intact.

Charitable auctions are common. The bidder gets a benefit, the item. But the items are always donated to the charity. The benefit didn’t cost the charity anything. The story stays intact.
Charitable lotteries (raffles) are also common. A person buys a ticket for a chance to win a prize. The ticket can benefit the purchaser. But the extra ticket costs the charity nothing.

One experiment changed a raffle from a fixed to a variable cash prize. The prize grew by 50% of each extra ticket sale. What happened? Funding dropped by more than half.[6] The prize wasn’t smaller. But the charitable story was damaged.

A donor’s benefit may be valuable. But it should add little extra cost for the charity. Thus, charities often provide,

• Use of facilities
• Admission to events, or
• Invitations to social gatherings.

These work because the extra cost for one more person is minimal. The donor’s story stays intact.

Emotional subtraction
Tax or charity benefits can help, but gifts still cost money. Often, we can’t change this number. But we can change the feeling from the number. In math, a number is a number. But in emotion, a number depends on the story of the number.

Reference points matter. Compared with routine disposable income purchases, a $1,000 gift can feel enormous. Compared with infrequent major purchases, it can feel reasonable. Compared with wealth, it can feel tiny. In all three cases, the cost is the same. But the feeling of the cost can change dramatically.

Losses hurt
In experiments, people spend differently using different payment types. Paying with currency creates a visceral loss experience. The person physically loses something valuable. People spend little with cash.[7]
Paying with a check is also a loss. But giving up a single check hurts less than giving up a stack of cash. People spend more with checks.

Paying with a credit card doesn’t feel like a loss. A person takes out a card but puts it right back. People spend a lot more with cards.[8] The more painful the cost feels, the less people want to spend the money. This is also true in giving.

Windfall giving: Easy come, easy go
In experiments, if money is earned by effort, people are less likely to donate it.[9] The more effortful the earning, the less likely the donation.[10] People are most generous with money from a windfall gain.[11]

In western culture, tithing originated in windfall gains. In Archaic and Classical Greek, tithing refers to offering one-tenth of the spoils of battle to the gods.[12] The first appearance of tithing in the Bible is similar. Abraham gives a tenth part to the priest Melchizedek following a victory in battle.[13]

In real life, windfall gains can come at different times. It might be a bonus at work, a stimulus check, or a tax refund. But for major gifts, this typically comes from the sale of an appreciated asset. This might be the sale of real estate, shares, or a business.

Thus, gifts of appreciated assets are powerful both objectively and emotionally. Such gifts are cheaper. Donating before the sale avoids capital gains tax. But this math advantage may be even more powerful as pretext. It triggers giving contemplation on the eve of a large windfall.

Avoiding money losses
Avoiding the feeling of loss is powerful in financial decisions. A long history of research shows this.[14] That’s why donating from a windfall gain feels easier. The cost doesn’t change, but it doesn’t feel like a loss. It feels like a slightly smaller gain.

Instead of being a loss, a donation can also be described as avoiding a loss. A temporary financial match can mean “lost money” if no gift is made. Jay Steenhuysen promotes asset gifts this way:

“Describe not giving assets as losing a 25% tax benefit.”[15]

The interest rate for complex gift deductions changes monthly.[16] This can mean losing valuable deductions if the deadline is missed. Or gift annuity rates may be about to drop. Either way, the message is

“Act now or lose money!”

Or maybe the donor is age 72 or older. Then this message can be

“Donate from your IRA or lose money when they force you to take it out!”

End-of-year tax deadlines can also help. This message can be

“Give now or lose the deduction for a year!”

Avoiding loss is money magic, not story magic
Loss avoidance is powerful in money decisions. So, does this mean fundraising story should be all about avoiding loss? Actually, no.

Many experiments have compared gain and loss framing in fundraising story. Taking them all together, the answer is, “meh.”[17] This being academia, the conclusion is a bit more formal. Researchers describe it this way:

“A meta‐analysis of 27 studies finds that gain‐framed and loss‐framed appeals do not differ significantly on persuasiveness in charity advertising.”

One approach did no better than the other. So, what’s going on? Loss framing does work. It works with finances.[18] It works with numbers. The math, logic, numbers system in the brain focuses on error detection. It focuses on avoiding mistakes and losses.

One experiment tested gain and loss framing for different fundraising messages.[19] What worked was “when the message combined abstract, statistical evidence with a negative [loss] frame, or anecdotal, vivid evidence with a positive [gain] frame.”

Story magic
Loss framing works with numbers. But good story presents both loss and gain. A compelling challenge forces a decision,

1. In response to a threat or opportunity for the donor’s people or values, and
2. With the promise of a victory for the donor’s people or values.

A good challenge presents a risk of serious loss (or at least a lost opportunity). But it also offers the hope of a gain. It promises a victory. A good story doesn’t end with, “Nothing changed.” That’s not a meaningful victory. That’s not a compelling story.

Wealth is a number and a feeling
Major gifts come from people who can make them. They come from people with wealth. Wealth is a number, but it’s also a feeling.

It’s important not to confuse your feelings about a number with a donor’s feelings. Consider this. If you had $50 million, would you feel “extremely financially secure?” Probably so. But only one in five households with an actual net worth over $50 million reported feeling “extremely financially secure.” [20] One in ten felt “somewhat insecure.”

Substituting your feelings about a number for a donor’s feelings is a mistake. It leads to misunderstandings. It’s easy to think that wealthy people don’t worry about money. Or that they don’t care about cost. Neither is true.[21] These feelings are important. They impact giving.

In national data, feelings about one’s wealth predict donations better than actual wealth.[22] Regardless of actual wealth, if people

• Feel their friends are better off than them, or
• Worry about needing cash,

donations fall.

Wealth is a feeling. Settings that increase the feeling of abundance encourage giving. It’s no accident that fundraising events are held in more opulent surroundings. They have abundant food and drink. These environments create the right feeling.

Cost is important for wealthy people
Wealthy people have more money. But there is a reason for this. Wealthy people like to hold wealth, rather than spend it. Otherwise, they wouldn’t become, or stay, wealthy.

This simple reality is important. It provides insight into the wealthy donor’s mindset. The importance of cost doesn’t disappear for the wealthy. If anything, it’s stronger.

The framing of cost is important for older wealthy people
The very wealthy tend to be older. The average age of those with $500 million or more in the U.S. is well over 65.[23] Most charitable bequest dollars come from wills signed in the 80s and 90s.[24]

In experiments, verbal framing of financial numbers is powerful. But it’s even more powerful among older adults.[25] Verbal framing is also more powerful among those with lower cognitive scores.[26] As people age, cognitive scores tend to decline.[27] Verbal ability actually stays higher in older age, whereas math does not.[28] Math fades, but story remains.

Conclusion
Cost is a number. So is wealth. And numbers are important. But for fundraising, the feeling about these numbers can be just as important. When cost feels less painful, giving increases. When resources feel more abundant, giving increases. Changing the story of money can change fundraising results.

Footnotes
[1] See, e.g., Brodeur, N. (2018, July 13). Why computer-engineer Barbie matters: A quest to fight stereotypes for girls, Seattle Times, https://www.seattletimes.com/life/lifestyle/why-computer-engineer-barbie-matters-a-quest-to-fight-stereotypes-for-girls/

[2] More formally, a match is associated with a “cooperation” frame, which makes donors feel more generous, while a rebate is associated with a “reward” frame, which does not. See, Bénabou, R., & Tirole, J. (2006). Incentives and prosocial behavior. American Economic Review, 96(5), 1652-1678.

[3] In fact, one experiment showed that a special kind of match can be even more effective.  In this experiment the match went not to the project the donor was giving to, but to a different project.  For example, a gift to provide water to one Tanzanian village was matched by a gift to provide schools to the village.  This complementary match told a better story and it worked better than the standard match.  What did not work as well was a different match that told essentially the same story.  For example, a gift to provide water to one Tanzanian village was matched by a gift to provide water to a different Tanzanian village.  That wasn’t a different story, and the impact of this type of match wasn’t as great.  See Adena, M., & Huck, S. (2017). Matching donations without crowding out? Some theoretical considerations, a field, and a lab experiment. Journal of Public Economics, 148, 32-42.

[4] Epperson, R., & Reif, C. (2019). Matching subsidies and voluntary contributions: A review. Journal of Economic Surveys, 33(5), 1578-1601.

[5] For an example where cash payments reduce charitable behavior, see Ariely, D., Bracha, A., & Meier, S. (2009). Doing good or doing well? Image motivation and monetary incentives in behaving prosocially. American Economic Review, 99(1), 544-55. For an example where the promise of cash payments reduce guilt and increase satisfaction for those who don’t support the charity see Giebelhausen, M., Chun, H. H., Cronin Jr, J. J., & Hult, G. T. M. (2016). Adjusting the warm-glow thermostat: How incentivizing participation in voluntary green programs moderates their impact on service satisfaction. Journal of Marketing, 80(4), 56-71.

[6] Dale, D. J. (2004). Charitable lottery structure and fund raising: Theory and evidence. Experimental Economics, 7(3), 217-234.

[7] Soman, D. (2003). The effect of payment transparency on consumption: Quasi-experiments from the field. Marketing Letters, 14(3), 173-183.

[8] Soman, D. (2001). Effects of payment mechanism on spending behavior: The role of rehearsal and immediacy of payments. Journal of Consumer Research, 27(4), 460-474; See this effect in study 1 of Chatterjee, P., Rose, R. L., & Sinha, J. (2013). Why money meanings matter in decisions to donate time and money. Marketing Letters, 24(2), 109-118, retracted due to errors in study 3, but see the argument for study 1 data in Rose, R. L. (2016). Cautious thoughts on “a social priming data set with troubling oddities”. Basic and Applied Social Psychology, 38(1), 30-32.

[9] Carlsson, F., He, H., & Martinsson, P. (2013). Easy come, easy go. Experimental Economics, 16(2), 190-207.

[10] Muehlbacher, S., & Kirchler, E. (2009). Origin of endowments in public good games: The impact of effort on contributions. Journal of Neuroscience, Psychology, and Economics, 2(1), 59.

[11] Arkes, H. R., Joyner, C. A., Pezzo, M. V., Nash, J. G., Siegel-Jacobs, K., & Stone, E. (1994). The psychology of windfall gains. Organizational Behavior and Human Decision Processes, 59(3), 331-347; Konow, J. (2010). Mixed feelings: Theories of and evidence on giving. Journal of Public Economics, 94(3-4), 279-297; Li, H., Liang, J., Xu, H., & Liu, Y. (2019). Does windfall money encourage charitable giving? An experimental study. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 30(4), 841-848; Reinstein, D., & Riener, G. (2012). Decomposing desert and tangibility effects in a charitable giving experiment. Experimental Economics, 15(1), 229-240.

This behavioral difference can be explained by social norms. In experiments, “Perceptions of what most people would consider a morally appropriate donation depend on the amount of income and whether it is a windfall.” Drouvelis, M., Isen, A. & Marx, B. (2019). The bonus-income donation norm. CESifo Working Paper No. 7961, https://ssrn.com/abstract=3498718

[12] Keesling, C. M. (2003). The votive statues of the Athenian Acropolis, Cambridge University Press.

[13] Genesis [14:17]-20

[14] Abdellaoui, M., Bleichrodt, H., & Paraschiv, C. (2007). Loss aversion under Prospect Theory: A parameter-free measurement. Management Science, 53, 1659-1674; Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics, 106(4), 1039-1061.

[15] Steenhuysen, J. (2017, February 8). Major gifts: Bigger, better, sooner. AFP/NCPGC Joint Luncheon, Washington, D.C. http://ncgpc.org/documents/n/national-capital-gift-planning-council/downloads/steenhuysenpresentationfeb8.pdf

[16] The section 7520 rate is used to calculate charitable deductions for complex gifts such as charitable remainder trusts, charitable lead trusts, charitable gift annuities, and retained life estates in homes and farmland. Donors can use the current month’s rate or either of the previous two month’s rates. Thus, it is actually the interest rate from the month before last that expires each month. However, if this offers a more favorable tax result, then failing to act by the deadline can be described as creating a loss.

[17] Xu, J., & Huang, G. (2020). The relative effectiveness of gain‐framed and loss‐framed messages in charity advertising: Meta‐analytic evidence and implications. International Journal of Nonprofit and Voluntary Sector Marketing, e1675.

[18] Loss aversion also works with death. See the classic study in Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), 453-458.  But that isn’t just a result of loss framing, per se. That’s also a result of death avoidance.  Death avoidance is a deeply rooted psychological construct of its own.  Among other things, it is a foundation for an entire field of psychology known as Terror Management Theory.

[19] “Importantly, our findings showed that, compared with the work of other charities, the relevance of the present charity was perceived to be higher when the message combined abstract, statistical evidence with a negative frame, or anecdotal, vivid evidence with a positive frame.” Das, E., Kerkhof, P., & Kuiper, J. (2008). Improving the effectiveness of fundraising messages: The impact of charity goal attainment, message framing, and evidence on persuasion. Journal of Applied Communication Research, 36(2), 161-175. p. 170.

Note also that a meta-analysis of such experiments finds that “Gain‐ and loss‐framed appeals do not significantly differ in persuasiveness concerning charity advertising.” Xu, J., & Huang, G. (2020). The relative effectiveness of gain‐framed and loss‐framed messages in charity advertising: Meta‐analytic evidence and implications. International Journal of Nonprofit and Voluntary Sector Marketing, e1675.

[20] Rooney, P. M. & Frederick, H. K. (2007). Portraits of donors: Bank of America study of high net‐worth philanthropy. The Center on Philanthropy at Indiana University. p. 11.

[21] This error starts with a skewed definition.  Rich people are other people who have a lot more money than we do.  They aren’t like us.  If we were that rich, we wouldn’t care about cost; so, why should they? But consider this. How does your household income compare with the global median of $10,000? How does it compare with the five poorest countries’ median of less than $1,000? From a global perspective, you are those other people who have a lot more money.  Do you worry about money? Is giving easy for you? Do you still care about cost? Considering this perspective may help show why these issues continue to be important even at various order-of-magnitude differences in income or wealth.

[22] Wiepking, P., & Breeze, B. (2012). Feeling poor, acting stingy: The effect of money perceptions on charitable giving. International Journal of Nonprofit and Voluntary Sector Marketing, 17(1), 13-24. Table 4: Model 1 and Model 2.

[23] Forbes. (2011). Driving global wealth: Mapping ultra high net worth individuals around the globe. Societe Generale Private Banking, https://i.forbesimg.com/forbesinsights/StudyPDFs/Driving_Global_Wealth_May2011.pdf

[24] James, R. N., III., & Baker, C. (2015). The timing of final charitable bequest decisions. International Journal of Nonprofit and Voluntary Sector Marketing, 20(3), 277-283.

[25] Besedeš, T., Deck, C., Sarangi, S., & Shor, M. (2012). Age effects and heuristics in decision making. Review of Economics and Statistics, 94(2), 580-595.

[26] Abeler, J., & Marklein, F. (2017). Fungibility, labels, and consumption. Journal of the European Economic Association, 15(1), 99-127; Hackinger, J. (2016). Not all income is the same to everyone: Cognitive ability and the house money effect in public goods games. https://ssrn.com/abstract=2786603

[27] Murman, D. L. (2015). The impact of age on cognition. Seminars in Hearing, 36(3), 111-121.

[28] Park, D. C., Lautenschlager, G., Hedden, T., Davidson, N. S., Smith, A. D., & Smith, P. K. (2002). Models of visuospatial and verbal memory across the adult life span. Psychology and Aging, 17(2), 299-320.

Related Resources:

• Donor Story: Epic Fundraising eCourse
• The Fundraising Myth & Science Series, by Dr. Russell James
• How To Use Numbers To Inspire More Giving (and How You Should NOT Use Them)
• The number one reason why people give is not what you think

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