Mental Accounting for Charity

1. Mental Accounting for Charity Joseph Thomas Paniculangara Xin He University of Central Florida

2. What is different about charity? • Economists study charity to understand the expenditure of resources without seemingly accruing benefits in return • Public goods nature of charity suggests indifference between one’s own contribution and others – taxes lead to crowding out • Impure altruism implies that one derives utility from one’s own contribution as well as from the total of contributions • An impure altruism account would suggest that people will feel happier by contributing toward charity due to the “feel-good”utility (Andreoni, 1989 &1990)

3. Mental accounting • Based on the value function of Prospect Theory – concave for gains and convex for losses, with losses looming larger • An individual is thought of as “a pleasure machine with gains yielding pleasure and losses yielding pain” (Thaler, 1986 & 2008) • Individuals maximise their pleasure by: • Segregating gains: (v (x) + v (y)) > v (x + y) • Integrating losses: (v (-x) + v (-y)) < v(-x - y) • Cancelling smaller losses: If x > y, then v (x) + v (-y) < v (x-y) • Maintain silver lining: A small gain will be considered separately from a large loss but cancellation may be preferred depending on the relative magnitudes

4. Mental accounting with impure altruism • Accepting the impure altruism motivation for charity, in that charitable contributions increase happiness, suggests: • A charitable contribution will lead to greater happiness if perceived as segregated from a windfall gain • A charitable contribution will lead to greater happiness if perceived as integrated with a smaller loss • A charitable contribution will lead to greater happiness if perceived as segregated from a large loss

5. Experiment 1 • 474 students enrolled in an introductory marketing class participated for extra credit • An insurance context was used as stimulus – participants read that they had paid their vehicle insurance premium for the month and received a letter, asking for either: • A refund of or a demand for the same amount of money • A request for a charitable donation or administrative fee ($20) • The two amounts were either segregated or integrated • The amounts asked for were either small or large ($100/ $30) • 2 x 2 x 2 x 2 factorial between-subjects design

6. Experiment 1 results • Simple main effect of refund vs. demand (F(1, 458) = 281.76, p < 0.001) • Simple main effect of charity vs. admin (F(1, 458) = 6.53, p = 0.011) • Marginal effect of large vs. small amt (F(1, 458) = 3.28, p = 0.071) • Considering the effect of integrating vs. segregating for different levels of size of amount and refund vs. gain • For a large refund with request for charity or admin fee, no simple main effects were found but a significant interaction was found between charity vs. admin and integration vs. segregation (F(1, 114) = 3.97, p = 0.049) • For a small refund with request for charity or admin fee, no simple main effects were found but a significant interaction was found between charity vs. admin and integration vs. segregation (F(1, 116) = 7.58, p = 0.007)

7. Experiment 1 results

8. Experiment 1 results • For the conditions of demand for money with requests for charity or administrative fees • For a large demand no significant interaction was found, however a simple main effect of charity vs. admin was significant (F(1, 113) = 3.8, p = 0.054) • Surprisingly, for a small demand no significant interaction was found, however there were significant simple main effects of both charity vs. admin fee (F(1, 115) = 3.81, p = 0.053) and segregation vs. integration (F(1, 115) = 9.41, p = 0.003). Integration was preferred to segregation.

9. Experiment 2 • Segregation vs. integration was depicted in an invoice from the insurance company rather than in text alone • Anchor of $100 was provided as recurring insurance premium • 289 students enrolled in an introductory marketing class participated for extra credit • Same insurance context as Experiment 1: • A request for a charitable donation ($20) following either a refund or a demand for extra payment • The two amounts were either segregated or integrated • 2 x 2 factorial between-subjects design • Also looked at simple effects of paying charity or admin fees

10. Experiment 2 results • Simple main effect of refund vs. demand (F(1, 137) = 38.71, p < 0.001) • Marginally significant interaction found between refund vs. demand and integration vs. segregation • (F(1, 137) = 3.61, p = 0.06)

11. Experiment 2 results • Significant difference in happiness experienced at paying an amount for charity if it was segregated rather than integrated with a refund (t (1, 70) = 1.95, p = 0.055) • Significant difference in happiness experienced at paying the same amount for charity compared to administrative fees (t (1, 70) = -2.36, p = 0.021) • Significant difference in happiness experienced at paying the same amount for charity as the insurance premium compared to paying the insurance premium (t (1, 67) = 3.25, p = 0.002)

12. Conclusion • In the first experiment as well as the second experiment, significant interactions were found indicating that participants preferred segregation of their charitable contributions even though it came out of their refunds • However, there was no significance for the interaction coefficient that included the large vs. small amount manipulation

13. Conclusion • In the first experiment, participants preferred integration in the demand for money condition regardless of whether the amount was for charity or administrative fees • It appears that participants experienced greater happiness at contributing towards charity than an administrative fee – even though paying an administrative fee maintains a necessary service

14. Hedonism and Charity • In the cause-related marketing literature, it has been found that charitable contributions work better as purchase incentives for “frivolous” products (Strahilevitz & Myers, 1998; Strahilevitz, 1999) • Windfall gains are more amenable to offset similar sunk costs (Soman & Cheema, 2001) • Money that is tagged with a negative valence may be “laundered” to remove the negative tag (Levav & McGraw, 2009) • Hence, it appears that charity is considered a hedonic expenditure rather than a utilitarian expense

15. Feeling good about Charity • Preference for segregation of the windfall income from charitable donation indicates that the donation leads to positive or “feel-good” utility • The greater happiness resulting from an equal charitable donation compared to administrative fee indicates that the act of charitable donation is considered beneficial • Even though paying an administrative fee to an insurance provider would maintain a relationship that provides utility viz. continuing insurance coverage

16. Implications • From the point of view of not-for-profit organizations, when refunds are sent to customers from for-profit firms, greater donations would result by asking for it with the refund • However, there appears to be a negative effect of asking for too much – a percentage of the usual premium led to greater happiness than an amount equal to the usual premium • From the point of view of theorising about charity, it would appear that consumers feel happier about giving to charity