Applications of Behavioral Economics in Philanthropy

Publication date: 
January, 2015

This paper considers how individuals incorporate in philanthropy unavoidable considerations of loss and risk in decisions which are made under conditions of uncertainty, albeit tested by means of a “laboratory” experiment employing hypotheticals based on grant‐making choices. Are natural and fundamental behavioral patterns exhibited in personal decision‐making carried over into decisions made in the philanthropic context, or do new behaviors emerge when one moves from personal choices to philanthropic ones?

The ultimate question here is likely how we want people to act in making philanthropic decisions.  Should foundations, for example, be “risk takers” so as to fund more uncertain steps that other sectors such as business and government will not undertake? This is a common outlook among those who emphasize the role of foundations in promoting “innovation” and see that function as requiring a heightened risk tolerance.

Or should foundations be more actuarial with respect to risk, more risk neutral, and define their role as facilitating important work where other sectors do not because of conditions such as failures of the market mechanism, imperfect information and/or political or economic inequities.  Admittedly, tying a non‐actuarial, risk‐taking profile uniquely to those emphasizing innovation while associating risk neutrality with “gap” strategic philanthropy is of course overstating the correlation.  Risk‐taking or risk‐

neutrality are associated with a variety of philanthropic philosophies.  But there may be some truth to the dichotomy and, in any event, the question exists as to how we might hope people handle unavoidable risk and uncertainty in philanthropic decision‐making.

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