Applying Behavioral Economics to the Nonprofit Marketplace: Unpacking the Ideas of Richard Thaler
Dr. Thaler’s economic behavior studies have specific implications for the nonprofit sector and more directly, fund–raising practices.
By Steven Windmueller, Ph.D.
Economist Richard Thaler, who was awarded this past week the 2017 Nobel Prize in Economics, has been in the forefront of the field of behavioral economics. Thaler’s ideas were extracted in part from Amos Tversky and Daniel Kahneman’s writings where these two former Nobel Prize winners’ employed risk factors to economic models of rational behavior.
In the early 1970s, when Thaler was a student, his professors didn’t argue that human beings were perfectly rational. They posited that human irrationality didn’t matter for the purpose of economic theory, because it wasn’t systematic. By exploring the consequences of limited rationality, social preferences, and lack of self-control, Dr. Thaler has shown how these human traits systematically affect individual decisions as well as market outcomes.
Power of the Nudge: Thaler’s research noted that by offering subtle suggestions, it will prompt people to act in certain ways, taking their social queues from such “nudges.”
Irrelevant Emotions: Basic human needs, he discovered, supersede a more rational approach to problem solving and other social behavioral practices.
Changing the Mix: Here, Thaler notes that if you make economic resources more accessible, people will behave differently, acting in their self-interests.
Making Choices Easier: Professor Thaler has argued that if you provide people with more simplified options dealing with their personal well being, they will be more likely to act. In some situations by making these choices more accessible, it can in turn improve their medical, retirement, and financial position.
Beyond these general principles, Dr. Thaler’s economic behavior studies have specific implications for the nonprofit sector and more directly, fund-raising practices. Here are six examples where Thaler’s theoretical principles can be applied to contemporary fundraising practices:
Peer Pressure: “Peer pressure comes from the power of the personal ask.” If an individual whom you know asks you to do something, you’re more likely to comply with the request. As is widely understood, personal connections prove to be a particularly powerful motivational force in securing a positive response. Often one responds out of a sense of obligation, not wishing to be embarrassed. On other occasions, donors are desirous of receiving praise for their actions.
Recognition: Public recognition for donors can inspire donors and their peers to give. Special status can serve as an important motivational factor to insure increased levels of support.
Social Impact: Researchers found that when donors were told what others had contributed, it affected the size of their gift and accelerated their level of interest in the cause.
Reciprocity: Personalized messages, videos, tours or gifts can create a sense of obligation, namely to repay the favor or gift through a donation.
Personalized Giving: If one only thinks about a cause through an abstract lens there is little to bind or connect the donor to the persons involved. However, when the donor is personally connected to the recipient or the project, it changes the dynamics from an abstract case to one of reality giving!
Donor Connection: If donors are reminded of their previous commitments or those of their family to a particular cause, group or experience, there is a compelling impulse to renew their support; consistency is a powerful motivator for action.
One analyst offered the following perspective: “There isn’t anything here that any good used car salesman doesn’t know.” To the careful observer, understanding human quirks of risk and inconsistent behaviors allows one to appreciate alternative ways to motivate and solicit others and to better anticipate social patterns.
The growing body of economic behavioral studies will benefit the nonprofit marketplace in better understanding not only donor conduct but also other actors within this sector.
Steven Windmueller Ph. D. on behalf of the Wind Group, Consulting for the Jewish Future. Dr. Windmueller’s collection of articles can be found on his website: www.thewindreport.com.