Game theory of charitable giving

Charitable giving is difficult for traditional game theory to explain. Game theory assumes that everyone behaves rationally, so why would someone give money away to charity and get nothing back in return?

But are they really getting nothing back? Surely it does feel good to know that you have given money to a good cause, it gives you a warm glow.

This ‘warm glow’ effect changes the nature of the game. Let’s say that someone who gets a warm glow from donating is ‘warm’ and someone who doesn’t is ‘cold’.

A cold person wants a charity to be successful but would be happier if it was successful without having to personally donate as they won’t get a ‘warm glow’ from donating they will just be worse off.

A generous person also wants the charity to be successful but would be happier if they had donated to the cause rather than not because they will get a ‘warm glow’ from the success of the donation.

If the project fails then both the ‘cold’ and the ‘warm’ person would rather not have donated. No-one wants to give money to a project that fails.

If the project is successful then a ‘cold’ person would rather not donate, if it is unsuccessful then they would also rather not donate. Either way they are better off not donating so they won’t donate. In game theory language to ‘not donate’ is a dominant strategy.

But, for a group of ‘warm’ people there are two possibilities. If everyone else doesn’t donate then the project will fail so the last person also won’t donate, but if everyone else does contribute then the last person won’t want to miss out on the warm glow so they will contribute too.

In game theory language there are two pure strategy Nash equilibrium: either everyone donates or no-one donates, this is a co-ordination game.

From the point of view of a charity the ‘cold’ people won’t donate anyway so they should focus on the ‘warm’ people. To get them to donate they need to see that a project is likely to be successful and then they will want to share the warm glow of success.

This links back to the research quoted in this post which showed that people will donate more when they see that a significant amount of money has already been raised towards a project. We can now see that this is because they think it is more likely to succeed and want to get a ‘warm glow’ from that success.

Today’s takeaway: People give more when they can see a project is likely to succeed because they want to share in that success.

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