Game Theory: One Tool For Understanding Donor Motivation
Development professionals often say fundraising is both an art and a science. Allowing for a blend of some art and some science leaves a lot of room for interpretation. There are no magic proportions of art and science in order to succeed. I might adjust my blend multiple times during my career, during a campaign, or even within a single cycle with a donor.
Major gifts require emotional commitments. It is difficult—even unfair—to reduce those gifts to equations and statistics. But there is also a great deal of experiential knowledge about fundraising, particularly in the realms of economics and statistics that can guide our activities. We ignore that science at our peril…
How do we strike a balance between the science and the art? Even better, how do we translate between the two languages so the emotional aspects of fundraising can benefit the scientific, and vice versa?
The answer may lie in the use of game theory, a field of study that melds mathematics and economics with the social sciences. While its title is a bit of a misnomer, game theory is a serious pursuit. Researchers use games or staged interactions to conduct experiments and illustrate their ideas. Game theory’s conclusions are sometimes intuitive, sometimes not. As applied to the field of fundraising, it often underscores things we already accept as truth.
What is game theory?
Game theory came together with the 1944 book Theory of Games and Economic Behavior, by John von Neumann, a mathematician, and Oskar Morgenstern, an economist. Their initial work focused on finding innovative ways to solve economic problems. Game theory was applied to biology beginning in the 1970s, and today contributes to many different fields of study.
Game theory models strategic interactions between self-interested parties. That could be a seller and buyer, different species of animals or opposing nations. The different participants’ goals might conflict or cooperate to any extent. Players might or might not have knowledge of their opponent’s goals and desires. Each player must base decisions on his or her best understanding of what the other party hopes to accomplish. That sounds a lot like fundraising. We identify, cultivate and solicit prospects based on our best understanding of those individuals’ aspirations.
The concept of costs and payoffs are central to game theory. When people are acting rationally they choose the lowest costs and the highest payoffs. Like game theory, fundraising exercises often have a “solution”: one strategic and tactical plan that, if chosen, will yield greater payoffs than any other plan. One of the most challenging and rewarding aspects of fundraising is trying to find that singular solution.
The myth of zero-sum fundraising
The term “zero-sum” is taken from game theory. A zero-sum game is one in which the players’ goals are in complete opposition; every gain by one player results in an equivalent loss for the other player. Poker is a zero-sum game because there is a finite amount of money around the table, and every dollar won by one player had to come from another player.
Too many development professionals think of fundraising as a zero-sum game. In this scenario, the players in the game are either two nonprofits—or two fundraisers in different departments within a large organization—vying for a donor’s contributions. How often do fundraisers refuse to cooperate because they each believe it will result in a smaller slice of the pie?
Imagine a hospital seeking $50 million to help build a new interdisciplinary patient tower. Fundraisers from five departments are part of a collaborative team to raise that money. Agreeing to join the group might be an obvious choice, but once there, each player’s choices become more complex. For example, collectively it serves the group’s goal for someone at the table to offer a $10 million lead prospect. But individually, a fundraiser’s instinct is to keep that prospect for his or her department.
This is an example of a non-zero-sum game in which payoffs accelerate if players cooperate. Even knowing this, game theory shows that people in these situations typically choose what is best for them individually while disregarding the welfare of the group. If we refuse to accept the idea of zero-sum, we can elevate the individual donor’s sights and the level of philanthropy in our organizations. Game theory’s first lesson for fundraisers is to refuse to accept the zero-sum mindset.
What motivates donors?
A major question in philanthropy is whether donors are motivated to give because of a perceived public benefit or for a private benefit. Public benefits are those that extend to people other than the donor (e.g., making a gift to help build a homeless shelter provides benefits for the homeless people, as well as the community at large, by reducing the need for government services). Private benefits are the prestige of a naming opportunity, tax deductions, or the “warm glow” of having done the right thing. If people are potentially motivated by both, how can we determine the appropriate blend?
Researchers analyze this question by considering two extreme positions. If the benefit for giving is entirely public, then an individual donor should not care who gives, so long as someone does. An increase in contributions from other donors should cause a dollar-for-dollar decrease in the original contributor’s gift (leading to the “free rider” dilemma). We often work under the assumption that much of the donor’s benefit is public. Case statements focus on the public good made possible through philanthropy. On the other hand, if the benefit is entirely private, then increased contributions from other sources should have no effect on the original gift. No other donor can compensate for the private benefit a donor receives from their own giving. Assuming the truth is somewhere in the middle, researchers can determine aggregate proportions to the public and private balance.
Surprisingly, research suggests that people are more motivated by private benefits than public benefits. Estimates suggest that as much as 65 percent of donor motivation stems from private benefits. This has significant implications for how fundraisers plan their approaches to donors. Depending on the personality of the specific donor, it may be less important to stress the public impact of a gift and more important to stress the prestige of a giving society or the intrinsic warm glow of doing the right thing.
Game theory and lead gifts
Game theory research offers an additional window into what motivates leadership gift donors. Prospective donors seek payoffs, public or private, based on their individual preferences. Determining the particular payoff of any gift requires some work by the donor. That work involves a cost, essentially to reduce the uncertainty of making the gift: time to meet with a charity’s CEO, time to tour a building, money to do research or pay others to do that research, etc. A philanthropist deals with this question every day: How do I choose which costs to pay in order to achieve the best payoff from myriad giving options? This is particularly true in large lead gifts.
James Andreoni suggests in his 2006 article, “Leadership giving in charitable fundraising,” published in the Journal of Public Economic Theory, that in addition to the public good provided by the campaign project, the lead donor to a campaign creates another distinct public good. That is a valuation of the organization and the project, expressed in terms of the lead donor’s gift. In other words, lead gifts inform other prospects about the potential benefit of contributing to the campaign. Other donors can forego the cost of determining whether or not to contribute by simply following the lead donor’s example. In essence, the lead donor pays the cost for them.
This all seems great, except that the lead donor has no precedent on which to base her decision. Because multiple lead solicitations can drain a campaign’s momentum, fundraisers labor to decide who should be first. Game theory gives us the answer: The person who will be the lead donor is the person for whom the cost (or uncertainty) of making that decision is lowest.
With this knowledge in hand, fundraisers can plan how to reduce the uncertainty for prospective donors. First, the cost of making the decision is relative to wealth. The wealthier the prospect, the lower his or her relative cost. Status is also important. Both experimental research and anecdotal observation show that following donors will contribute more if the lead donor is an individual of higher status.
Development professionals can also reduce the informational component of the cost by involving donors early in the planning process, so the cost is spread over time. Best of all, fundraisers can place top prospects on their board. This reduces the cost because donors learn about projects through their board service. When notices are printed about mega-gifts to campaigns, one common feature is that the donor is a current or former board member of the organization. This is not a coincidence. Board seats, where the cost of receiving information is lowest, should be reserved for the wealthiest and highest status prospects. Experience teaches us this, and game theory confirms it.
Success in development often rests on the core assumption that people are inherently charitable. It is not our job to make them philanthropic but rather to help them be philanthropic. Prospects often have a great psychological distance to travel in order to arrive at a lead gift commitment. Game theory teaches the importance of reducing the uncertainty donors feel about making these awesome commitments.
Abraham Maslow said, “It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” Game theory is not a universal tool, but it can help connect the science and metrics of fundraising with the art of motivating philanthropists.