Joseph Thomas PaniculangaraXin He

University of Central Florida

Mental Accounting for Charity

What is different about charity?Economists study charity to understand the

expenditure of resources without seemingly accruing benefits in returnPublic 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)

Mental accountingBased 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

Mental accounting with impure altruismAccepting 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

Experiment 1474 students enrolled in an introductory marketing

class participated for extra creditAn 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 moneyA request for a charitable donation or administrative

fee ($20)The two amounts were either segregated or integratedThe amounts asked for were either small or large

($100/ $30)2 x 2 x 2 x 2 factorial between-subjects design

Experiment 1 resultsSimple 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. gainFor 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)

Experiment 1 results

Experiment 1 resultsFor the conditions of demand for money

with requests for charity or administrative feesFor 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.

Experiment 2Segregation vs. integration was depicted in an invoice

from the insurance company rather than in text aloneAnchor of $100 was provided as recurring insurance

premium289 students enrolled in an introductory marketing

class participated for extra creditSame 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 integrated2 x 2 factorial between-subjects design

Also looked at simple effects of paying charity or admin fees

Experiment 2 resultsSimple 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)

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)

ConclusionIn 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

ConclusionIn 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

Hedonism and CharityIn 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

Feeling good about CharityPreference 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 beneficialEven though paying an administrative fee to

an insurance provider would maintain a relationship that provides utility viz. continuing insurance coverage

ImplicationsFrom 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 refundHowever, 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