The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life

by Gneezy, Uri

  At Young & Rubicam, Brian learned just how far inside the box people in the ad industry could be. “We would produce hundreds of good ideas, and then the agency tested everything in focus groups,” he recalls. “But they refused to go with any of the good ideas that came from the testing sessions because the ideas didn’t have anything to do with the client’s corporate strategy. Instead the agency went with boring, ill-conceived commercials that had everything to do with strategy and nothing to do with selling potato chips or Jell-O,” which happened to be what they were selling.

  Brian needed a better place to sell his creative ideas, so he took a job at J. Walter Thompson, where he made million-dollar beer commercials. “I’d go into the board room of Miller where a bunch of old white guys in suits made all the decisions. I’d play the youth card and tell them, ‘I’m the only guy in this room who was in a bar at one in the morning,’” Brian says. “I was winging it with my ideas. I didn’t go in with PowerPoints and a lot of data. I just spoke with a lot of passion. Eventually I got to be good at making presentations to rich people.”

  Brian walked around Madison Avenue, resplendent in Armani suits and Gucci loafers. He thrived in the Mad Men–esque world of cocktail lounges and beauty everywhere—beautiful ads, beautiful products, and beautiful people. But he grew restless working for other people, so he started his own advertising firm. His talent for selling ideas paid off when he cofounded Schell/Mullaney in 1990. The firm served clients in the media and high-technology businesses, such as Dow Jones, Computer Associates, and Ziff-Davis.

  On the outside, Brian was a smart, competitive businessman who swam with the Madison Avenue sharks. On the inside, he was walking around with the memory of what had happened to his little sister. In 1996, he and his partner sold the firm for $15 million dollars, and at the age of thirty-six, Brian was “done. It was an unbelievable amount of money,” he says. “Suddenly I realized I had the freedom to do what I really wanted.”

  Brian was too entrepreneurial to follow the typical conquests of the newly rich. He didn’t try to sail around the world or earn his PGA card. He was the type of guy who loved to innovate, to push the envelope. Maura’s memory drove him to want to help children, so he went on a medical mission to China. There he witnessed the social isolation children with cleft palates suffer and how easily their lives could be transformed with a simple surgical procedure. So, in 1998, he partnered with Computer Associates founder Charles Wang to found Smile Train.

  Not bad for a Madison Avenue adman.

  The Business of Smiling

  People such as Brian who are founders of charities are driven by passion, but making a charity a real success requires acute business sense. “Most charities are very inefficiently run by do-gooders,” Brian insists. “No matter how inefficient or incompetent you are, it is almost impossible for a charity to go out of business. As long as you have a set of PowerPoint slides with pictures that can make people cry, you can raise enough to stay in business.”

  Smile Train is unique among charities because Brian set it up like a business. In the same way Brian innovated as an adman, he destroyed the curve when it came to both raising money and doing good works. Basically, he turned the old missionary-style do-gooder model on its head. Instead of sending Western doctors to perform cleft surgeries, Smile Train developed state-of-the-art 3D technology to educate doctors in developing countries in cleft palate surgery (Brian calls this the “teach a man to fish” model.)

  Smile Train is also unique because it conducts field experiments to see which kinds of donor incentives work best. For example, says Brian, Smile Train ran a lot of tests to see which would work better: a “before” and “after” photo of a child, or simply the “before” photo? As an adman, Brian knew the standard formula was to show both the before and after photos. “After all, it was a famous advertising edict that people want to see the ‘before-the-wash’ and ‘after-the-wash’ shots, as they do in Proctor and Gamble detergent ads,” he says. “But when we ran the test, we found when we only ran the ‘before’ photos, the response rates went up 17 percent. Why? The picture of the kid with the cleft palate haunts you.” The implication, he says, is that the photo of the child in need made the plea for money personal. Donors felt they had to help the kid with no upper lip.

  Smile Train also conducted several field experiments to discover what kinds of photos could get the donation envelope opened. They tested responses to forty-nine different envelopes emblazoned with pictures of black, brown, Asian, and white boys and girls of various ages and wearing different expressions—some smiling, some frowning, some staring, some crying. As Smile Train discovered, faces are powerful attractants, and certain kinds of faces draw more donor money than others.

  In December 2008, Smile Train tested twenty-one of these different photos on the outer envelope of another direct-mail package assortment. The winning photo attracted 62 percent more donors than the one that donors liked least. Smile Train discovered that the photo of the sad-looking Caucasian child (who was Afghani) drew the most response. Why? Brian conjectured that white donors—who comprised the majority of the donor pool—preferred to help someone who looked like them.2

  The “Once and Done” Option

  By the time we got to know Brian, he had honed in on several unique ways to raise money, which were guided by his unswerving use of field experiments. He would send potential donors letters that would “invite” them to donate, or to “save the life of a child.” The messaging in the letters would reflect the learnings from years of field experimentation on direct mail that drove Smile Train’s annual donations up to nearly $100 million per annum.

  Brian was intrigued by our ideas about behavioral economics and charity. He wondered if we could help Smile Train outperform the best direct-mail letters that he had personally spent years developing and refining. We decided to set out by starting with Smile Train’s best-performing letter and working to improve it. Though we didn’t know it at the time, we had begun a path toward one of the most interesting, large-scale field experiments we had ever run.3

  Back in April 2008, we started with a test. We sent letters to 150,000 households. The control group received a standard Smile Train solicitation asking for a donation. We had no special text or slogan on the outer envelope. The experimental group received letters sealed in an outer envelope that read, “Make one gift now and we’ll never ask for another donation again.” The letter told prospective donors they could exercise this right by checking a box on the reply card that said, “This will be my only gift. Please send me a tax receipt and do not ask for another donation.” Donors were given one more option; they could also elect to receive “limited mailings” (which could prove to be a boon for Smile Train in postage savings).

  This mechanism might seem a little crazy. Many fundraising experts, manuals, and guides would mock the very idea, because one of the most important tenets in fundraising circles is to develop a so-called donor pyramid.

  A visual representation of the types of donors a typical charity has and how numerous they are.

  In a donor pyramid, the base includes dedicated donors who will give to your cause again and again. When you find such donors, why on earth would you tell them “thanks for helping our cause this one time! Now, we will never contact you again”?

  In the months after the first test in which the mailing was sent out, the donations started to trickle in. And all signs pointed to one thing: our experiment had been a gigantic success. In response to the letters sent out in April, the standard letter raised $13,234 from 193 donors, whereas the “once and done” letter raised $22,728 from 362 donors. In total, the experimental treatment raised much more money and engaged many more donors than the standard letter did. Interestingly, only 39 percent of donors checked the opt-out box.

  The “once and done” campaign was so successful that we decided to step back and use it in other field experiments. In total, we sent mail solicitations in five waves to more than 800,000 indi
viduals between April 2008 and September 2009.

  Again, we found a dramatic increase in giving under the “once and done” campaign. The “once and done” letters generated a response rate nearly twice as large as the standard letter. It also brought in slightly larger gifts (on average, $56 versus $50). Consequently, the “once and done” campaign raised more than twice as much initial revenue as the standard letter ($152,928 versus $71,566), yielding a remarkable $0.37 per letter mailed.

  Of course, if subsequent donations were lower in the “once and done” group, then the conventional wisdom would have been correct. That is, we should not have been urging people to “bug off.” Interestingly, what we found was that the subsequent revenue raised turned out to be nearly identical across the “once and done” and the standard letters.

  Combining the revenue from both initial and subsequent donations, “once and done” generated a total of $260,783 compared to $178,609 for the control mailings—an increase of 46 percent. In addition, because of the restrictions on future mailings dictated by checkbox responses, Smile Train also saved mailing costs because they were not continually sending to an uninterested donor.

  Just having such a successful drive is important, but we wanted to dig into why “once and done” letters work so well. What was going on?

  Reciprocity: The Key to Customer Satisfaction

  After analyzing the hundreds of thousands of observations across the various field experiments, we found that switching the power from the charity to the donor was the game changer. By giving recipients the chance to opt out, Smile Train basically offered donors a gift. It relieved them from having to say no to future solicitations. Instead of merely asking for money, the charity basically said, “You scratch our back, we’ll scratch yours.”

  Traditional economics assumes that, acting in their own best interest, many people will just smile and toss away the direct-mail appeal. Yet, not all of us are selfish. Some of us, even some economists, are nice people who really do want to return a kindness with a kindness.4 Knowing this, appealing to people’s sense of reciprocity can work. Nonprofits, especially, like to send preprinted address labels, maps of the world, or calendars, hoping to get a donation in return.

  More generally, our result highlights hidden returns associated with incentives that are overlooked if one maintains a standard economic model. For instance, our interpretation also means that the psychological message that is conveyed by incentives—whether they are perceived as kind or as hostile—has important behavioral effects. Intentions matter: if you are a company that cares about customers, then it’s important to know that customers really appreciate being asked their opinions, and they love being asked if they want to opt out.

  Our explorations in the world of charity have big implications. In policy circles, people want to know the answer to this question: If we get rid of the tax write-offs for charity, what happens to all the charities that hold society together? What happens to government grants? Before detailing the effects of such proposed changes, we need to understand why people give to charities in the first place.

  Here’s another thing that Brian, adman-turned-philanthropist, can teach us about business. If he understands anything, it is scale. Smile Train now conducts roughly 100,000 surgeries a year, and that number is going down—not because Smile Train can’t help more children, but because the charity’s services have caught up with the world’s needs. Children with clefts no longer have to wait for the help they deserve. Brian didn’t want to stop with fixing clefts, however; he wanted to go after even bigger problems. Having come away with what works to drive charitable donations, he parted company with Smile Train and founded a new operation called WonderWork.org.

  This new charity attacks five easily fixable problems poor children around the world face: blindness, club feet, burns, hydrocephaly (“water on the brain”), and holes in the heart. Inexpensive surgeries can address each of these. Take blindness, for example. More than forty million blind people populate the world. Of these, says Brian, “half could regain their eyesight with a ten-minute outpatient surgery that costs a hundred bucks.”

  WonderWork.org, which Time named in 2011 as “one of 10 ideas that change the world,”5 has a unique organizational structure no charity has ever tried. “We are going to build a General Motors of Compassion with different charity brands that tackle single causes,” says Brian. “Just like GM has Chevrolet and Cadillac, we will have a blindness brand, a club foot brand, a burns brand, a hydrocephalic brand, and a hole-in-the-heart brand. By managing five causes under one roof, we reduce overhead and administrative costs for each cause by 80 percent. That gives us huge advantages. If we are successful in creating five new Smile Trains, we can create 100.”

  While Smile Train has made great use of “once and done” campaigns so has WonderWork.org. One of WonderWork.org’s “brands,” Burn Rescue, has also used it to great effect.

  After extensive testing in a 2012 mailing of over four million pieces using the “once and done” campaign, WonderWork.org expects to bring in over 350,000 donors and raise around $15 million with this offer in 2013.

  Even better, Brian hopes to double the revenue per donor because contributors will have more than one cause from which to choose. The new structure doesn’t let donors lapse, because it “cross-sells”—something unheard of in the nonprofit sector. “Charities hate the word ‘selling’!” Brian says. “But I love it.”

  Obviously, not too many people in the charity world are like Brian. He is an entrepreneur. Most of the bigwigs in the nonprofit world are still terrified of changing business as usual—which isn’t to accuse them of negligence, just status-quo bias. Their hearts are in the right place. Many probably got involved in nonprofit work because of a deep belief in trying to do as much good as they possibly can in the world. Acknowledging that donors might not share that belief, or be as altruistic as charities would like to believe, might feel like conceding defeat.

  Still, it’s increasingly obvious that charities are the frontline providers of many kinds of important public services and goods. As federal and state governments cut back on funding, resources for aiding children, seniors, the poor, the environment, and the arts all lose. Organizations such as the Sierra Club, Amnesty International, the Red Cross, and all the great nonprofits that do everything from feeding, housing, and educating the needy to providing us with great arts and entertainment need someone to step up for their cause. Scientific reasoning can help.

  The Foundation for Long-Term Success

  Having dug deeper into the economics of charity, we have uncovered solid, quantifiable evidence on how incentives work to attract new donors and customers; more importantly, this evidence lays the foundation for long-term success. We now know that seed money, humbly proportioned matching grants, raffle tickets, sad-eyed Caucasian children with cleft palates, and a pretty woman on a fellow’s doorstep can all help raise money. Our evidence shows that social pressure accounts for a sizeable proportion of the motivation to give. We believe tontine-like schemes might work to open people’s pocketbooks. And we’ve discovered that giving people the right to opt out not only increases giving now, but lays the groundwork for efficient campaigns later as well.

  In the end, we suspect that even though everyday givers focus on that warm, glowing feeling, larger donors—those who give millions of dollars a year—are more influenced by changes in the tax code. If you think about it, this makes sense. Come tax time, the federal government allows you to deduct dollars you give from your reported income if you itemize your deductions. For those itemizers in the 35 percent tax bracket, this allowance effectively drops the price of giving a dollar down to about something like 65 cents. Not a bad incentive to give.6

  We all assume that people give because doing so helps others. But the truth, as we have seen in our field experiments again and again, is that many people give more out of self-interest. Sadly, charities haven’t understood this just yet. To get people to open their
wallets, charities have applied certain tricks of the trade—announcements of having raised 33 percent of seed money, 3:1 matching grants, direct-mail appeals, and so on—relying on tradition and formulas. In so doing, they have left money on the table.

  In a wide variety of experiments—from Smile Train campaigns to the Sierra Club, from the University of Central Florida to neighborhood streets around the country, we found that certain long-held assumptions about charitable giving don’t hold much water. Frankly, we were not surprised to discover that men give more when beautiful women ask them. But we were surprised to learn that Smile Train donors more frequently open an envelope when the kid on it looks like them. In the words of the inimitable Carly Simon, we are (all) “so vain.” In the end, we need to feel that we have some skin in the charitable game.

  Our conclusion is simple: charities, by necessity, will need to stop relying on hand-me-down formulas and begin experimenting more; if they do not, they will lose to their competition.

  We hope that the field experiments described in these chapters offer a set of new ideas, prescriptions, and lessons that can help organizations to take that first step (or at least call us to make that first step!). As the sector advances, field experiments will serve as a tool that revolutionizes it, and field experiments will become the rule in the nonprofit world, rather than the exception.

  Next, we will visit another set of managers in need: those who lead for-profit companies.

  CHAPTER ELEVEN

  Why Is Today’s Business Manager an Endangered Species?

  Creating a Culture of Experimentation at Your Business

  It’s a sweet, blue-sky September day in New York City. The year is 1965. The taxi driver drops a man at the corner of 1st and 64th. He steps into the new art-nouveau restaurant. Checking himself out in a greeting mirror, he finds he looks super-sharp in his Brooks Brothers suit, black necktie, and starched white shirt. A hint of Old Spice drifts from the pulse in his neck.