Joseph Thomas Paniculangara

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Mental Accounting for Charity

• Joseph Thomas Paniculangara
• Xin He
• University of Central Florida

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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 ones own contribution and
  others taxes lead to crowding out
• Impure altruism implies that one derives utility
  from ones 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-goodutility (Andreoni,
  1989 1990)

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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)) gt v (x y)
• Integrating losses (v (-x) v (-y)) lt v(-x - y)
• Cancelling smaller losses If x gt y, then v (x)
  v (-y) lt 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

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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

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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

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Experiment 1 results

• Simple main effect of refund vs. demand (F(1,
  458) 281.76, p lt 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)

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Experiment 1 results
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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.

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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

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Experiment 2 results

• Simple main effect of refund vs. demand (F(1,
  137) 38.71, p lt 0.001)

• Marginally significant interaction found between
  refund vs. demand and integration vs. segregation
  
• (F(1, 137) 3.61, p 0.06)

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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)

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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

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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

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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

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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

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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

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