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5 Behavioral Economics Theories To Keep Your Nonprofit From Getting Left Behind – Creative Science

Published by Nate Andorsky

Our mission at Creative Science is to leverage behavioral economics to build strategies, campaigns, and technology for today’s most important causes. Behavioral economics is the marriage of psychology and economics; it is founded on the understanding that humans do not always make the rational trade-offs economists would expect them to. Rather, we act in predictably irrational ways.

Behavioral economics provides a framework to help us understand why people make decisions. Because the tenants of behavioral economics have such a significant impact on how, why, and when people give, understanding this field of thought is essential for those in the nonprofit world. In this post, I’ll describe the five theories from behavioral economics that I think are the most critical for you to understand so you can make sure your nonprofit organization doesn’t get left behind.

#1 Identifiable Victim Effect

The identifiable victim effect is exceptionally important for nonprofits who help people to understand. Ignoring this theory leaves money on the table, hands down.

Karen Jenni and George Loewenstein first published this theory in 1997. They conducted studies showing people tend to offer greater aid when an identifiable individual victim is presented as being under hardship. When people consider the plight of a single victim, they empathize with that specific person and they respond more strongly and emotionally than if they’re told the plight of even two or three victims.

One of the most powerful ways you can captivate potential donors’ attention is to tell and show them one individual victim’s story. This increases the likelihood that they make a donation. The more similar the victim to the individual or someone the individual knows (gender, geographic location, age, name, etc.) the more powerful this effect.

We created a landing page for the Campaign for Tobacco-Free Kids that expertly leverages the identifiable victim effect. This image presents a specific person, which elicits feelings of empathy. Notice the intentionality of being able to see the victim’s eyes. The eyes hold a vast amount of information about one’s emotional state and deepen our connection to this identifiable victim and thus our desire to donate to this nonprofit.

#2 Anchoring

Anchoring is the behavioral economics theory that shows someone’s initial exposure to a number serves as a reference point and influences their subsequent judgments about value. You start with some anchor, a number you hear or see, and then adjust it in the direction you think is appropriate.

Anchoring can also be thought of as the human tendency to rely too heavily on the first piece of information that an individual receives (called the “anchor”) when making a decision. Once this anchor has been established, there is an overall bias toward interpreting new information around this anchor. For example, when you’re told something used to cost $149.99 but it’s now on sale for $99.99 you think it’s a great deal! You only think this is a great deal because of the information you have about the “regular” price.

How much a donor gives to a nonprofit can be significantly influenced by a strategically placed anchor. Taking the time to understand anchoring and employ it effectively will serve your nonprofit well moving forward. For example, anchoring can be used when presenting various donation options or giving levels.

Presenting donors with options of making a $1, $3 or $5 donation can result in lower donation totals than if you present $3, $5 or $10 donation options. You’ll see the anchoring effect even more starkly when you compare what people donate when they see a $1, $3, and $5 donation array against what they donate when they see a $30, $50, and $100 donation array.

When choosing which dollar amounts to present you don’t want to push the envelope too much. The donation options also send a signal to donors about what is normal and expected

If someone would donate $20 to your nonprofit and the pre-listed options are $200, $500, and $1,500, they may think you don’t care about their $20 and decide not to donate after all. You want to avoid this scenario. Determining what should go in your donation array should involve testing and iterating.

The image below is a screenshot of a donation page we created as an example design composition for the fictional nonprofit Africa Reads Now. This uses several behaviorally-informed techniques, but the anchoring plays out in the fact that the $200 donation is a different color than the others. It is highlighted and thus becomes the reference point in our minds. We are also anchored in part by the lower bound ($50) and upper bound ($500) donation amounts. Our minds adjust the amount we choose to donate, using these amounts as reference points.

#3 Reciprocity

The reciprocity effect occurs because people tend to respond to a positive action with an additional positive action. This ultimately rewards acts of kindness. Further, it means that in response to friendly interactions, people are more likely to be much nicer and cooperative than one would expect from the self-interest model.

When donors give it is imperative to close the reciprocity feedback loop by clearly communicating how their donations are helping further your cause. While your donors won’t expect a physical item in exchange for their contribution they should receive an emotional warm-glow feeling after they’ve donated. Make sure to clearly communicate back to donors the impact their donations have made and that their contributions are appreciated. This closes the reciprocity loop and encourages more donations. Too often nonprofits accept donations and support but do not communicate back to their supporters the impact of their assistance.

Reciprocity is about creating a positive feedback loop, not engaging in a transaction. Be very careful with giving small gifts as a sign of appreciation. These can make the donation feel transactional and can crowd out the positive effect of altruism. If you do want to give your donors a small gift, the best way to do this is to give it unexpectedly. This will engender further reciprocity.

#4 Herd Effect

The herd effect is the tendency for people to follow the behavior of a larger group. Social psychologists have been studying the human tendency to act as part of a group or mob since at least the 19th century. Our tendency toward herd behavior is present in our consumer behavior and in the ways we interact with each other. The herd effect is also part of our desire to fit in with social norms. We want to make socially desirable decisions and are attuned to what other people are doing, i.e. keeping up with the Jones’.

Here’s a story of how this has played out in a field research setting – scientists at the University of Leeds instructed volunteers to randomly walk around a spacious hall without speaking to one another. A few of the volunteers were given specific directions in advance of where to walk. Those who were given specific directions ended up influencing the people who were not. The key finding from this experiment was that it only takes about 5% of people who appear confident to influence the direction of the other 95% of the people in the crowd. The volunteers who didn’t receive instruction followed those who did without even realizing it.

Human beings are social creatures and herd behavior is one of the most powerful influences in our society. Social feeds on a website are a great way to leverage this theory. Consider posting photos of current supporters to your website (with their permission of course!) to showcase the people supporting the cause. Encourage supporters to post to social media about how they’re helping your nonprofit. If you want to check out a great example, GoFundMe expertly leverages the herd effect on their donation pages.

ONE Campus, an initiative from the ONE Campaign, also leveraged the herd effect by holding a competition among different colleges to see who could raise the most money. A public facing website showcased a leaderboard that was updated in real-time. This strategy leveraged the herd effect to incentive colleges to compete against one another which helped to catapult action.

#5 Scope Insensitivity

People are insensitive to the scope of the problem and they have a hard time really understanding what large numbers mean. This has been demonstrated in a research study that showed the number of lives saved (referred to as the scope of the altruistic action) has little effect on the donor’s willingness to pay. No human can visualize 20,000 lives, let alone 200,000 or 2 million. Researchers have found that an exponential increase in scope creates a linear increase in the donor’s willingness-to-pay.

When telling potential donors how many lives their donations can save, be mindful of scope insensitivity. We just don’t “get” numbers, but we do “get” stories. Which brings us back to our first theory, the identifiable victim effect. Rely on stories, not statistics, to convey your value proposition to potential donors. Because donors’ willingness-to-pay only increases linearly to an exponential increase in scope, consider limiting the scope in order to minimize the gap between the two. Alternatively, utilizing a smaller denominator is another effective mechanism for combatting scope insensitivity. For instance, instead of saying “# per year”, say “#/365 per day.”

So there you have it! The identifiable victim effect, anchoring, reciprocity, the herd effect, and scope insensitivity. Five of the most important behavioral economics theories for nonprofits to understand. Leveraging these theories in your nonprofit’s fundraising efforts is absolutely critical to keep your organization from being left in the dust of other savvier nonprofits.

About the author:

Nate Andorsky

Nate Andorsky

Nate Andorsky is the CEO of Creative Science. He spends every day thinking about how to use behavioral economics in the digital space to help nonprofits move people to action. He was born to be an entrepreneur and is certain he would be fired if he ever worked for anyone but himself again.