The (Ugly) Math of 50-50 Fundraisers

January 16, 2012 • Development, Economics • by
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One of the readers of the Freakonomics blog asked a question about 50/50 fundraisers. If you are unfamiliar, these are fundraisers where you buy raffle tickets and the organization keeps 50% of the money raised and gives away the other 50% to the winner of the raffle. Freakonomics reader Melissa Belvadi writes:

This strikes me as an incredibly bad deal, but a bit complicated to explain why, as it contains 2 components:

  1. As a gamble: poor expected value. I am not sure how to calculate this, but from my experience in Las Vegas where slot machines boast being set to 97% return ratios, a gamle where 50% goes to the “house” seems unlikely to be a good EV.
  2. As a charitable donation: poor “program ratio” - at most, 50% of my donation will go to the “program” (charitable cause) - this is considered a very poor ratio in the philanthropic world where typically 60% is the bare minimum acceptable - the BBB requires 65%

I completely agree with the above analysis. I think that 50-50 raffles are not great gambling or philanthropic decisions but they are obviously popular for a reason. To understand why I wonder if it helps to think about it from the perspective of the purchaser.

A person who purchases a lotto or traditional raffle ticket certainly hopes to win, but I don’t think there is any expectation that they will win. People might not be great with statistics but they understand that the odds are stacked against them. So win they think about their future they face two scenarios: the rare chance they win and become wealthy; the likely scenario though is that they will lose and be out their money.

In a 50-50 raffle the two outcomes are changed. There is still the rare chance that they will win but now if they lose they’ve still done something good with that money so it softens the blow some.

Does your organization do a 50-50 raffle? Do you participate in them? Tell me why or why not.

How To Spot A Bargain in Philanthropy

December 8, 2011 • Blog, Philanthropy & Giving • by
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What makes something a bargain in the philanthropic world? Last week, Dean Karlan wrote a post on the Freakonomics blog entitled, Bargain Hunting for Charities. He wrote,

Gosh that sounds so stingy. When we are charitable, we don’t want to be cheap. This is our moment of giving, of generosity, not bah-humbugness. Alas, that is exactly what we should be. If we go to a restaurant for chicken wings, what would you think of the following prices:

  • 4 chicken wings: $8
  • 6 chicken wings: $8
  • 8 chicken wings: $8

Which would you opt for (assuming more is always better)? Naturally, it shouldn’t require much thought. So why not apply this to charity?

Karlan then goes on to highlight GiveWell, a great organization that does some very innovative work in studying nonprofit institutions and makes recommendations about excellent charities. There are a couple of similar organizations, but GiveWell seems to be the most robust. Unfortunately, many of these resources are vastly under-utilized when it comes to an individual’s giving, with only 1 in 10 donors utilizing such resources at all.

I love Karlan’s premise but I’d like to take it one step further, because the issue isn’t really that we go to the same restaurant and are shown the same price for different quantity wings. It’s more like different restaurants offering a burger at different prices. In that case we don’t always go for the cheapest. I’m not going to eat a burger at McDonald’s when I can go to Kuma’s Corner.

As donors we shouldn’t be focused solely on quantity but quality as well. We trade off those things in our consumer purchases all the time, and the same thing can occur in our philanthropic choices as well. A focus solely on quantity leads to ever decreasing overhead which does not always lead to the best quality (think low overhead, large transaction chains like McDonald’s). Quality and quantity are not positively correlated, but they don’t have a negative correlation either. Just because something is more expensive does not make it better.

As we approach our philanthropic decisions let’s think about quantity and quality. Also, check out resources like GivingWell. They help you make good giving decisions.

Conspicuous Philanthropy

July 21, 2011 • Blog, Business, Development, Philanthropy & Giving • by
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There is a theory in economics called Conspicuous Consumption. It’s essentially the “Keeping Up With The Jones’” theory. People buy things so that they can signal some sort of status or ideology. When you see your neighbor buy that nice car, you want one as well so you don’t appear less than your neighbor. I think we can all admit that we’ve at least seen this behavior (not in ourselves of course but in our neighbors).

This morning I came across an interesting Freakonomics podcast about Conspicuous Conservation. It profiled two budding economists, Steve and Alison Sexton (twins, and worse, the children of economists). They have an interesting draft of a paper entitled, “Conspicuous Conservation: The Prius Effect and WTP [Willingess to Pay] for environmental bona fides.”

They essentially are saying that because the Prius is known as a hybrid and hybrid only, as opposed to say the hybrid version of another car (the Honda Civic Hybrid for example), it is more easily identified as hybrid and provides a better signal to the world that the driver cares about the environment. This signal however, only matters in areas where others care about the environment, for example in San Francisco rather than Texas.

What they found is that in areas with higher rates of environmentalism not only do you see the sale of all hybrid vehicles increase, sales of Prius’ are a markedly higher proportion of the market. People want others to see them as environmentally friendly.

Now what does this have to do with philanthropy?

What if, philanthropy harnessed this conspicuousness in a new way. For decades people’s names have been added to buildings, benches, etc. But what if we found new ways to allow people to engage in conspicuous philanthropy?

I think we’re already beginning to see this movement take place and it has a lot to do with revenue streams.

People don’t but Toms because they are particularly good shoes, they buy Toms because they want to signal to the world that they care about poor people, that they have given a pair of shoes to someone in need.

What are ways that your organization can help donors engage in conspicuous philanthropy? How can you tap into consumerism to increase support for your organization?