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Joseph Thomas Paniculangara Xin He University of Central Florida Mental Accounting for Charity.

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Presentation on theme: "Joseph Thomas Paniculangara Xin He University of Central Florida Mental Accounting for Charity."— Presentation transcript:

1 Joseph Thomas Paniculangara Xin He University of Central Florida Mental Accounting for Charity

2 What is different about charity? Economists study charity to understand the expenditure of resources without seemingly accruing benefits in return Public 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)

3 Mental accounting Based 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

4 Mental accounting with impure altruism Accepting 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

5 Experiment students enrolled in an introductory marketing class participated for extra credit An 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 money A request for a charitable donation or administrative fee ($20) The two amounts were either segregated or integrated The amounts asked for were either small or large ($100/ $30) 2 x 2 x 2 x 2 factorial between-subjects design

6 Experiment 1 results Simple main effect of refund vs. demand (F(1, 458) = , 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. gain For 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)

7 Experiment 1 results

8 For the conditions of demand for money with requests for charity or administrative fees For 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.

9 Experiment 2 Segregation vs. integration was depicted in an invoice from the insurance company rather than in text alone Anchor of $100 was provided as recurring insurance premium 289 students enrolled in an introductory marketing class participated for extra credit Same 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 integrated 2 x 2 factorial between-subjects design Also looked at simple effects of paying charity or admin fees

10 Experiment 2 results Simple 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)

11 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)

12 Conclusion In 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

13 Conclusion In 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

14 Hedonism and Charity In 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

15 Feeling good about Charity Preference 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 beneficial Even though paying an administrative fee to an insurance provider would maintain a relationship that provides utility viz. continuing insurance coverage

16 Implications From 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 refund However, 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

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