By David Leonhardt, Published: March 9, 2008, The New York Times
http://www.nytimes.com/2008/03/09/magazine/09Psychology-t.html

Editor's Note: This month's very long feature article should interest both business people and fundraisers alike. Its point is basically that our conventional wisdom tends to be correct - with significant exceptions. [more]

What Makes People Give?
by David Leonhardt

Not long after the 2004 presidential election, John List and Dean Karlan formed an unusual partnership, with the idea of teaching a little-known liberal group how to raise more money. Karlan, an economics professor at Yale who spent much of his time studying global poverty, was himself a liberal and disheartened by President Bush’s re-election. He had given money to this particular group in the past.

List, however, was a political iconoclast who, if anything, tilted to the right. He taught economics at the University of Chicago, which can fairly be described as the center of conservative economic philosophy, and he had recently finished a stint as the environmental expert on President Bush’s Council of Economic Advisers. When he and I were talking on the phone last month, he referred to Karlan, who is a friend of his, as “a left-wing nut” and then let out a laugh.

But List’s interest — and, in truth, Karlan’s main interest — wasn’t to help the liberal group get more money. It was to try to find an answer to a gnawing question: What makes people give their money away?
List and Karlan considered the usual answers (to make the world a better place, to see your name printed in the back of an annual report and the like) too pat, too simple — and sometimes just wrong. Over the years, whenever one of them asked fund-raisers why they did what they did, the responses were vague and unimpressive. There didn’t seem to be much empirical evidence to support the strategies employed by most fund-raisers. So the two economists wondered whether charities were wasting a lot of effort.

The two met a couple of years earlier and talked occasionally about matching gifts, which are a staple of fund-raising. Karlan told List about a $15 million “challenge gift” that an investment banker made to the University of Chicago back in the 1990s, with the stipulation that it would receive the money only if it persuaded other donors to give as well. People around campus, where Karlan was a student at the time, assumed that such a gift would work — that it would cause other donors to give more than they originally planned — but he wasn’t so sure. And it turned out that this was just the sort of problem that List had a reputation for solving.

Thirty-nine years old, with a boyish face, graying hair and the twang of an upper Midwesterner, List went to college at the University of Wisconsin-Stevens Point, helped by a golf scholarship, while driving trucks during the summer to make money. He became an economist, he told me, because he noticed that the economics professors at Stevens Point spent a lot of time playing golf. “I came from a poor family, and I was thinking about being a stockbroker,” List told me when I met him recently. “When I saw those economists golfing, I thought, I want to do what they do.” But a funny thing happened when he began taking economics classes: he liked them. After Stevens Point, he attended graduate school at the University of Wyoming and then began crisscrossing the country for a series of faculty jobs. By 2004, he had become known as a dedicated researcher — a workaholic, even — and was emerging as the star of a growing little corner of the field, the economics of philanthropy.

A few days after Bush won re-election, Karlan got an idea. He e-mailed a fund-raiser at the liberal group — which he and List have agreed to keep anonymous, as is common in academic research — and explained that he wasn’t just a donor. “In my ‘real’ life,” Karlan began, “I am an economist who runs field experiments to learn what works and what does not in the world of social programs.” He then proposed a field experiment, involving matching gifts, in which the group would learn how well they really work. “Have you ever done something like this?” Karlan asked. The group hadn’t, and it quickly agreed to work with him and List.

For a long time, philanthropy was mostly ignored by social scientists. It’s not an especially large part of the economy, and most charities operate on a shoestring, without the resources to finance research projects. But this is starting to change. Americans gave $295 billion to charity in 2006, equal to 2.2 percent of the country’s gross domestic product, up from about 1.8 percent from the mid-’70s to the mid-’90s, according to the Center on Philanthropy at Indiana University. Most philanthropy still comes in the form of small gifts, but there is also a growing group of donors, like Bill and Melinda Gates, who are interested in bringing some of the quantitative rigor of big business to philanthropy.

Academics, for their part, have come to realize that charities provide an excellent laboratory for studying human behavior, in part because so many of them are desperate for the kind of free-of-charge consulting Karlan was offering. When charities are designing their donor appeals, they often go by nothing more than a few rules of thumb, some of which may be profoundly insightful and others a good deal less so. “I think some fund-raisers have developed terrific intuitions, passed on through the fraternity of fund-raisers,” says Paul Brest, president of the William and Flora Hewlett Foundation in Menlo Park, Calif., which often works with charities. “But a lot of the intuitions don’t work. Look at how much junk mail you get.” Matching gifts were another good example. People figured that they worked, because — well, how could they not? They seem so sensible.

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