The following is a conversation between John A. List, Professor of Economics at the University of Chicago, Chief Economist at Walmart, and author of The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale, and Denver Frederick, the Host of The Business of Giving.
Denver: We live in a society that highly values and rewards innovation. If you go to Amazon and type in innovation, you will find over 60,000 books. But the work of scaling those innovations can almost be an afterthought. A similar search will yield only 4,000 results. My next guest thinks there is something wrong with that picture and has written a book to address it.
He is John List, the Kenneth C. Griffin Distinguished Services Professor in Economics at the University of Chicago, the Visiting Robert F. Hartsook Chair in Fundraising at Indiana University’s Lilly Family School of Philanthropy, and the author of a splendid book titled The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale. Welcome to The Business of Giving, John.
John A. List, Professor of Economics at the University of Chicago, Chief Economist at Walmart, and author of The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale
John: Wow. I love that intro. Thanks so much for having me. I need you as my front man, Denver.
Denver: Well, you know, it’d be a lot easier, John, if these chairs that you had didn’t have middle initials. You have to really slow up,: or you’re going to bolix it, so I did do that.
John: You did a great job, and it just doesn’t flow off the tongue like John List. We know that’s pretty simple, right?
Denver: Yeah. Yeah. When I saw that, I said he’s not getting the A with all these other initials. I’ll tell you that.
John: But maybe I actually should have, because John E. List is a very bad man, and I’m probably the most unfortunately named economist in the world. And I’m going to leave it at that because I don’t want to send our listeners down a path of looking over John E. List rather than John A. List.
Denver: Which is August.
John: That’s right. That’s right.
Denver: There you go.
John: That’s my father and grandfather’s name. That’s right.
“If your aspirations are that you really want to change the world, or you want your idea to have big impact, my book is really about trying to detail what is the DNA of an idea that’s truly scalable. And if it doesn’t have great DNA, what are the features that we should fine tune or change to give your idea its best shot? That’s The Voltage Effect.”
Denver: Wow. So, this is like an ancestry show so far. You know what I mean? Well, I love the title of your book, John. Tell us what is The Voltage Effect?
John: Yeah, yeah, it’s a good question. So, whenever I talk about The Voltage Effect, I look in the audience, and I see a bunch of engineers that squirm because what they say to me is,” John, you’re actually talking about wattage. In our world, you are really referring to wattage.”
And I say, “Look, give me a little bit of artistic liberty because nobody will buy a book called The Wattage Effect. So, I called it The Voltage Effect, Okay?” So, voltage to me really is if you have an idea, that’s the creativity part. That’s the innovation. But what you do to start is you set up a Petri dish, and you try to explore: How good is my idea?
And now comes the scaling part, because the scaling part is: Will my idea be able to work outside of the Petri dish? So, you not only have innovation, but you have diffusion. And when I diffuse that idea out into society, what are the prospects for that idea to maintain the high voltage that I observe in the Petri dish?
So, I think about The Voltage Effect is it worked in the small. Can it work in other areas of the economy, or other areas of the world for other types of people? And if it does, I say, that’s a scalable idea. If it doesn’t, I say: Look, we need to go back to the lab.
If your aspirations are that you really want to change the world, or you want your idea to have big impact, my book is really about trying to detail what is the DNA of an idea that’s truly scalable. And if it doesn’t have great DNA, what are the features that we should fine tune or change to give your idea its best shot? That’s The Voltage Effect.
“Art is great on the wall, but art should not dictate how we spend our scarce resources. That should be science.”
Denver: That’s a great overview. When you started this work, John, was there any science around scaling, or was it considered more, let’s say, an art, the art of scaling?
John: I love that you’ve done your homework, my friend. When I first was sort of hit with this idea of scaling, I was a chief economist at Uber. I then became the chief economist at Lyft, and now I’m the chief economist at Walmart. But back at Uber, what I would hear a lot is: Move fast and break things!
Fake it till you make it. Throw spaghetti against the wall, and whatever sticks, cook it. This is art. This is quite frankly art, and the fact that we primarily have relied on art to make decisions on whether ideas should go from the small to the large. Look, I worked in the government for two years 20 years ago. I was an advisor to the president, and it was art.
And look, and I love art, don’t get me wrong. Art is great on the wall, but art should not dictate how we spend our scarce resources. That should be science. So, I saw all of this art and all of these wasted opportunities, and I said: Look, we need to add science to this, and it’s what I call the science of using science because we have a lot of great solutions that work in the Petri dish.
But then I began to ask myself, if we’re so great, why haven’t we taken a better chunk out of poverty and alleviated poverty? Or why haven’t we tackled climate change in a reasonable way? Why do inner city schools continue to fail? Why do we have discrimination, et cetera, et cetera, et cetera?
And I think it’s largely because we have designed solutions that are meant to work in the Petri dish, and they’re not meant to work in the large, and it’s just been a fundamental failure of people like me, social scientists, who really want to change the world, but we really haven’t thought about the science of moving from the Petri dish to the large.
Denver: And it’s also a fundamental contribution and the value proposition that academics bring to this work, isn’t it?
John: No, I think you’re exactly right. So, as academics, we want to change the world, and we never really know exactly how to do it because we typically don’t have a foot in the ivory tower and in the business world, or with philanthropists or with government agencies; that’s typically not how we do business.
But I have done business like that. My world is I go out to the commoners like me, the bucolics like me, and I learn about what’s important. But I also do experiments in the real world, and they’re called field experiments. So, I learn about what works and why, and I saw time and time again that when we try to translate something from the small to the large, in many cases it fails, but it predictably fails.
So, I started to think, what if we reversed the process of research? And we said from the very beginning, I want to create an idea that is scalable. I thought: How would we change our thinking and our way of doing business as an academic or as a researcher? And then I wanted everyone to hear that because the public might not believe this, but academics at their very core, want to change the world.
They want to do it in the classroom, and they want to do it with their research, and I think we need to begin to be serious about the science of how to use their science to give them a better chance. That’s where I come in with this idea.
“If the initial success was due to the chef, it will never scale. The reason why is because unique humans don’t scale. Now, what you can do is you can try to systematize what they do, and then you have a chance.”
Denver: Well-stated. Well, the List thesis, if I can call it that, is every scalable idea is the same. Each unscalable idea is unscalable in its own way. Explain that.
John: Okay. Now, your well-read readers will say, Oh my gosh, John has just brought out a little bit of Tolstoy.
Denver: Yeah, absolutely.
John: Though I like that.
Denver: From families, right?
John: Exactly. You’re a hundred percent right. So, here’s where he and I kind of depart because his issue about family is he basically says each unhappy family is unhappy in its own way, and that’s true. And I have eight kids, and I can promise that every day, there’s a new reason why my family is unhappy.
So, Tolstoy has what I call a dimensionality problem. He gave us some insights, but they’re kind of useless in a sense because if there’s a new problem every day for my family, how am I going to solve that? I don’t have that problem with the book.
So, what I do is I talk about the five vital signs of why ideas don’t scale. And indeed, that’s the first chapter, is the first vital sign, and that’s called False Positives. And what’s kind of amazing is that when you look at the modal reason why government policies and regulations fail is because there were simply false positives to begin with.
They never had a chance, even though in the Petri dish they looked good. When they scaled them, it was just a false positive. It was a statistical artifact. And in chapter one, I talk about Nancy Reagan.
Denver: Yeah, the drug prevention. Yeah.
John: And that, you know, I went through that in high school as a junior in 1985, ’86. The officials came in and said, you know: Don’t use drugs because if you do, your brain will shrink and your private parts will shrink. And I said, Yikes!
But that was simply a false positive in the end, you know. We tried to scale that; it didn’t work. They went back and tested it again. So, kind of a main reason in chapter one is false positives. Chapter two is about knowing your audience. A lot of times our ideas will work for a small group of people, and that small group of people tends to be handpicked. But when we report those results, we forget to tell everyone else, you know, it was handpicked.
So, this is like an extent of market for your business types in your audience. Vital sign number three is the situation. So, you know, in light of chapter two, which is about your audience, it’s also the case that there are certain situational features that make ideas very difficult to scale, and what I talk about in chapter three is a case of restaurants.
A lot of restaurants try to scale. They kill it with one restaurant. They have, say, EBITDA of a million dollars. They would say, Wow, if we would have 50 restaurants, we’d have EBITDA of 50 million plus some economies of scale.
Denver: Absolutely. Makes perfect sense to me.
John: Perfect sense.
Denver: Eureka.
John: But here’s what happens. If the initial success was due to the chef, it will never scale. The reason why is because unique humans don’t scale. Now, what you can do is you can try to systematize what they do, and then you have a chance. So, think about it, when I was at Uber and Lyft, Uber and Lyft would’ve never grown to their current size had they needed Danica Patrick and Al Unser Jr., and all of these famous drivers to drive their vehicles.
But they don’t need that. They need people like me, like ordinary Joe who can drive, but now they’re realizing that that type of driver can get us so large and so profitable… I know, not that profitable, of course. And now, they’re trying to systematize it, and that’s why they’re using computers and autonomous vehicles as the next generation.
So, really chapter three is about: Understand the situational features that your idea is working in, and make sure those non-negotiables are available at scale. Chapter four is about what an economist would call general equilibrium effects. And basically, these are big terms for every idea, there are spillovers.
And, in the Petri dish, since it’s in the small, your initial inquiry might miss the broader spillover effects that your idea might have. And a good example is sort of what happened to me at Uber. At Uber, my team was responsible for rolling out tipping in the app. And a lot of your listeners might be like, Wait! What’s going on? There has always been tipping.
Denver: You’re the guy? That’s what they’re saying, probably.
John: Yeah. I’m the guy. And I tell the story in The Voltage Effect, but basically, the summer of 2017, my team beta-tested having tipping in the app. So, how did we beta-test it? What we did, for example, is we went to Chicago, the Chicago market.
And we took 5% of drivers out of the market and said, “You can receive tips and all the other 95% of drivers cannot receive tips.” And then we looked at what happened. Well, here’s what happened. The drivers who could receive tips earn more money per hour. And they worked more. Oh, it’s a win-win.
But guess what happened that fall in October and November when we rolled it out to all the drivers on Uber. Well, what happened was they all worked a little bit more, and what that did is it made driver supply so large that it decreased wages. So, by the time you add the extra supply with the tipping, it ends up kind of being a wash.
Denver: Yeah, yeah. Unintended consequences that nobody saw. Let me ask you something about these things though. I mean, what if you talk about the inability to detect false positives or perhaps not seeing the spillover effect. How much do you think that is those innovators missing it? And how much of it is maybe them wanting to miss it… not looking that hard? Now, the answer to this is going to be an art, I realize, but let me know what you think.
John: I love that question though. No, I love your question. You’re right. You’re right. I think with the first one, with the false positives, I break false positives down into three kind of buckets. The first bucket is: it was just a statistical error, and that’s going to happen 5% of the time to the best of them.
That’s why we say it’s significant at the 5% level, that’s what that means. But the second bucket is what I call human error. So, it’s a person thinking they’re doing a good job with the data analysis, but they’re not really. That’s a pretty big bucket. Third bucket is human fraud. and I talk about Theranos and Elizabeth Holmes in chapter one.
I talk about some examples in the academy. Those are real. So, if you think about these buckets, that second bucket, human error… in the third bucket, human fraud, there’s a lot of that. You’re right. And some of it is intentional; some of it is, you know, let’s say a degree of: I just made a mistake.
All of these combined to be very, very important to this idea of scaling. Now, with the unintended consequences, those are harder. Those are a little bit harder; and there, what I want people to do is stagger your rollout. So, you start with a smaller group, and then as you go larger, you can observe these spillovers in interesting ways.
So, we did that at Uber. What I left out is we didn’t just go 5% to 100%. We went to 10%, 15%, 20%, 30%, and we saw what was going to happen. But the horse was already out of the barn, and we had already announced we’re going to have tipping. So, there’s no way you can bring that horse back in.
Denver: No, you can’t.
John: But that’s harder, to be honest, and there’s less, let’s say, science around these general equilibrium effects or these spillover effects. It’s an ambitious and new area of research, but I think it’s going to take some years to fully understand the wheres, whens, and hows of these kinds of spillovers.
Denver: And one last vital sign that I really loved was focusing on the last dollars spent.
John: Yeah. Yeah. So, the last vital sign, you know, a lot of your listeners might say, Well, John keeps talking about benefits and how the benefits of an idea might not scale. You know, they might say, I thought he was an economist. What about the supply side?
And that’s right. That’s chapter five as you correctly bring up. And that’s the supply side of the scaling issue. And here, I want you to think about as I expand my idea: Does it get more or less expensive per person who I serve, for example?
So, you know, I started a Pre-K in Chicago Heights that’s meant to help underserved kids. And one of the non-negotiable elements we needed in that idea is we needed good teachers. So, okay, you might ask, is it even possible to scale that because: Are there enough good teachers around?
Well, as it turns out, there only will be if you increase their salaries exponentially. But now, that’s an idea that has what economists call diseconomies of scale. Because as I expand, it becomes more and more expensive to provide the Pre-K, and that’s sort of an idea that really won’t scale because the cost side just kills you.
And within that, you’re right. What you talked about is one of the true ways to make sure that you’re optimizing in this dimension is to always think on the margin. And what that basically means is: What are the marginal benefits or the incremental benefits of, let’s say, the next unit of what I’m providing? And what are the marginal costs or what’s the incremental cost to provide that next unit? And that’s how economists are a little bit different. We end up thinking in margins rather than in averages.
Denver: Yeah.
John: And marginal thinking’s really what makes it a much more, let’s say, optimal project or efficient project.
“…my way of thinking about culture is it allows each worker or associate, or whatever you want to call them… to, at once, be happy, have proper mental health, but also reach their production frontier.”
“…it’s hire the right people because if you start to hire rotten apples, and you’re not hiring a diverse org. from the very beginning, you are stepping into a pile of stuff that you don’t want to step into.”
Denver: Yeah. When you disaggregate like that, and you see what those last 10 bucks brought, yeah, it may have been zilch. All benefits were in the first little bit, but that’s not going to be on the PowerPoint. It’s going to be a 38% increase, and that’s what we’re going to go by.
Well, you point out in the book, John, that perhaps the hardest challenge of all is scaling culture, and I have a lot of nonprofit CEOs on the show, and I talk to them about scaling all the time, and every time I ask them: What was the hardest part, they invariably say, “Oh, scaling the culture.” Why is it so hard to scale culture?
John: Yeah, no, you’re exactly right. I’m glad you brought that up. So, I think there’s two parts to this answer. The first part is a lot of times we don’t even understand how to define what is culture. So, culture is one of these words a little bit like creativity or cleverness or critical thinking. If you ask 30 people what is it, you might get 30 different definitions. So, first reason why we don’t know how to scale it is because we all define it differently.
Denver: Don’t know what it is.
John: We don’t know what it is. If you don’t know what it is, how can you measure it?
Denver: Yeah.
John: If you can’t measure it, how can you improve it? So, my way of thinking about culture is it allows each worker or associate… or whatever you want to call them… to, at once, be happy, have proper mental health, but also reach their production frontier. So, we all have frontiers of how productive we can be. Now, you have a happiness frontier, and you have a productivity frontier.
And I think a well-oiled and well-run company, has a culture that allows each person to get to those two frontiers. So, after you define it like that, now you can start to say, Okay, what is the science behind that? And the science that I brought forward in that chapter was, first of all about if you think about diversity, equity, and inclusiveness,… I think about organizations as ecosystems.
And the more diverse they are, any good ecosystem, to be resilient, is going to have to be diverse. That’s what I learned when I used to be an environmental economist, right? I did a lot of work with ecologists in the area of environment. And the strongest ecosystems are the most resilient ones. The most resilient ones are the ones that have the most diversity.
A lot of the evidence suggests that firms are like that, too. Okay. So, how can you have a diverse and inclusive environment that’s fair? I think about it from the very beginning of your firm: It’s hire the right people, because if you start to hire rotten apples, and you’re not hiring a diverse org. from the very beginning, you are stepping into a pile of stuff that you don’t want to step into.
Denver: Well-said.
John: Yeah. So, I talk about that and talk about how even the way that we frame our job advertisements, those matter.
Denver: Yeah.
John: And those matter in systematic and predictable ways. So, that’s point number one. It’s just to have the right selection of people. So, selection is important because even though you have a great culture, if you bring in a bunch of bad apples, it’s not going to work, even though you adhere to certain norms.
The second thing is to set up the environment to where it’s more inclusive. It’s debate, but without fear of an aggressive retribution. And it’s disagreement with saying, Okay, now we can go have a cup of coffee afterwards, and I see your point. And a lot of this is theory of mind. It’s having the ability to put yourself in the shoes of the other person and saying, Look, I hear you, I see where you’re coming from. Here’s why I think you’re wrong.
And, you know, if you don’t have a theory of mind, let me tell you about how I’m thinking about this. Once you have a culture of theory of mind, I think at least you have the ingredients set up to have a culture that can work and that can scale.
Denver: Yeah, I hear you. And you want that intellectual friction without having the social friction to go along with it. And if you can do that, you’re going to be in a sweet spot. You also talk about, if I can say this right, “coopetition.”
John: Yeah. Yeah. No, that’s a buzzword that I tried to pick up and push, but nobody but you had picked it up.
Denver: Well, the word will go forth from here on out. Now that I know I can say it, I’ll start spreading it.
John: Oh, you said it great. Say it every day. Look, it did… look… that part hasn’t worked just yet. But, look, sometimes ideas take a little while. I think it’s true. I think these are the two elements that you want. We need cooperation in the workplace, but we also set up the incentives for there not to be cooperation, right?
When anytime you have a pyramid, only one of us is going to be able to get the promotion. So, why should I help you? So, you have this balance to where you want some level of competition, but you need some level of cooperation because a lot of our production functions are team-based production functions.
And we have to have a way then to dole out the credit in a way that everyone thinks is fair, and there’s science here behind how to do all of this. And I think that’s really an important part of building an appropriate culture, having that right balance at every level; whether you’re going up or looking across the pyramid, those elements are super important to have in a good culture.
Denver: Yeah. Yeah. No, I agree with you. You have too much cooperation. People are too nice. You go a little flat and, you know, you need a competition. I think we all like to play games. We all like to win.
You want to have it friendly, but it kind of gets the juices going, you know, as opposed to just like: This is a, you know, going to the lounge and just laying back and having a cup of coffee. So, I think, it’s actually a great balance. And I also was taken by the idea that you thought that employees… this is around teams now… would be served well if they were on two teams.
John: Yeah. I’m glad you brought that up, because in every organization that I’ve been part of, whether it’s the academy, whether it’s working in the Federal government, whether it’s working with, let’s say, 501(c)(3)s, whether it’s working in firms— Uber, Lyft, Walmart, they all have silos, and the silos are set up for a particular reason, and that’s because, for example, we want group number one to work on driver incentives.
So, your job is to figure out in Uber: What is the best way to incentivize drivers. They do it; they have a group of 120 people, who are in a silo, looking at their data, and they’re doing their job and they’re good people. But you have another group over here, marketplace, or another group over here, customer side, and they’re all doing their stuff in silos.
And when you’re not talking across silos, you’re missing key opportunities, first of all, to, let’s say, cross-fertilize ideas, because a lot of times what works in one silo will also work in another. But also, there are spillovers to what’s happening on one side of the market might affect the other side of the market.
And in these key places, I argue, we should always have people that are sitting across these silos and within different silos to make sure that we have the best chance to take advantage of those opportunities and those learning opportunities. In fact, that’s exactly what I’m doing at Walmart right now.
I have my team, but then they are also reporting to a different group in a different org that is trying to change the world on say, for example, e-commerce or pricing or the labor side. These are all important parts of any org or any firm, and people should be talking across these silos. The biggest, let’s say, inefficiency that I’ve seen in orgs is that these silos tend to operate in isolation.
Denver: Yep. No doubt.
John: And they don’t talk across them. And this is in every org that I’ve seen. It’s amazing. You could write an entire tome about this and about the gains that we’re losing because of these silos.
Denver: And those silos can be even more pronounced in this Zoom world, because I have noted that Zoom is very, very good for vertical communication— that you get your marketing team, your finance team, I’ll tell you, I don’t think the communication’s ever been better, but no one is being influenced by any of the adjacent teams.
And the only time those adjacent teams get together is on a, you know, 90 rectangles or “Hi, how are you doing? Have a good weekend” type of stuff, but nothing really meaningful. So, it’s even more pronounced now that we need to get that cross-fertilization.
John: You’re a hundred percent right. And that’s a great point. I’ve never thought about that point, but as I think about my experiences, I was at Lyft when COVID happened. And that’s exactly what happened, what you’re talking about. And so, I could see it. I had the before and after.
And, for me, it actually made me, as the chief economist at Lyft, it actually made me less effective because I would go out there every two weeks or three weeks pre-COVID, and I would bump into people, and I would sit in some meetings, and I would see these are the problems that they’re trying to tackle. And I could see how my work could fit in their solution set, and I then missed that when COVID happened.
“They work, but they don’t work how you think they work.”
Denver: Yeah. Well, you know what happens, you don’t connect the dots anymore because you don’t know where the dots are. I mean, you even connected a dot earlier on when you were talking about workplace culture, and you related back to your time as an environmental economist, and you kind of thought about that and then brought it into the culture and the ecosystem.
So, there’s those things that happen spontaneously, which have been completely lost.
Well, in our remaining time, let’s turn our attention to philanthropy, because I mentioned before you’re the chair of the fundraising there at the Lilly Family School of Philanthropy. And you’ve done such great research, and as somebody who’s been in the sector their whole life, I want to give you a tip of the cap because we’ve used some of it.
John: Oh, thank you so much.
“Feeling good about giving is a good trait in and of itself.”
Denver: Let’s start with matching gifts. Do they work?
John: Yeah. A great question. They work, but they don’t work how you think they work.
Denver: You have me intrigued.
John: I have you intrigued. That’s my teaser. That’s my teaser. Let’s use that as a banner, Denver. So, look, back in the late 90s, there was a knock on my door. I was an assistant professor at the University of Central Florida.
And in 1998, the Dean of the Business School at the University of Central Florida, Thomas Keon, knocked on my door. And I answered and he said, “Look, John, I know you’re just an assistant professor, but I’d love it if you could start a center called the Center for Environmental Policy Analysis. And in starting that center, I want you to try to raise money for that center.”
Denver: There’s always a kicker.
John: There’s always that kicker. So, I said, Look, let me think about it. So, I thought about it. I went back to him and said: I’ll do it under two conditions. One, I want to run the fundraising as a field experiment because I’ve learned a lot about this area, and there’s a lot of art in this area.
It’s great art, but it’s nevertheless art. And I need you to give me some money up front so I can leverage that money to bring in more money for the center. And where did I get that from? I got that from Kent Dove’s fundraising bible, and all the practitioners told me you need upfront money.
So, he gave me $5,000, big whoop, but he gave me $5,000. Okay. So, he arms me with a bunch of warm list people at University of Central Florida, and I define warm list as they’ve given in the last three years. He gives me the $5,000.
And then I start to think about what would an economist do with this upfront money and how an economist thinks about it and how do practitioners do business. You know, you have raised 33% of money in a quiet period. Then you announce it. Some people said raise 50%, et cetera, et cetera. So, a first study was testing that.
And then people said, Well, instead of just announcing you have seed money, maybe you should use those upfront dollars as matches in a matching gift. And then I started reading Kent Dove’s bible and it says, Of course, a more attractive match, which is three-to-one, works better than a two-to-one match, which, of course, works better than a one-to-one match.
Denver: Of course.
John: Of course, it does. So, I started to think what Dove just said in that statement is the law of demand. So, in Economics, the law of demand means as you lower prices, people buy more. Okay. That’s basically what Dove is saying because the price of each dollar you’re giving goes down with three-to-one versus two.
Okay. So, I said, Well, he’ll be correct if people are buying Snickers bars and bottles of water when they’re giving to charitable causes because that’s the law of demand. But he’s wrong if they’re buying something else. Okay. So, then I went to the literature to try to find: what are the tests out there of three-to-one, versus two-to-one, versus one-to-one, versus no match at all.
I couldn’t find any science. So, I said, I’m going to do it. It’s a simple experiment. So, I ended up running this experiment within 2005 with Dean Karlan. And, by this time, I was gone from University of Central Florida, and I had been doing work for, I don’t think I can even name the org anymore, because I’m bound by a confidentiality agreement. But I think in the paper, we say something like an org that fights for the rights for workers.
Denver: Ah, okay. There you go. That’s our next banner.
John: So, we simply did it. We took one group, and we sent them a mailer. And we were asking them for money, and we didn’t mention a match. We compared that group to another group that we sent a bunch of mailers to and we said, We’re going to match your contribution one-to-one. And then, there’s a third group that’s two-to-one, and a final group that is three-to-one.
Okay. So, we sent, I think, it was 50,000 letters out, and we observed. Well, the dollars rolled in. And here’s what we observed. When you look at the group that did not receive a match versus the other three combined, the match groups raised a lot more money per person. In fact, it was about 20% more.
So, just having the match there, whether it was one-to-one, two-to-one or three-to-one, we grouped all those together, and you raise about 20% more money, and it comes from more people giving. Okay. The existing people don’t give more. It’s just that you have higher participation. Okay. That’s a part that you could kind of guess.
Denver: Yeah. Right. That makes sense.
John: Here’s a part that I think most people don’t know and get wrong. The one-to-one, versus two-to-one, versus three-to-one groups, there was no difference in giving patterns.
Denver: Wow.
John: So, now, that’s important because as a fundraiser, I don’t want you wasting match dollars. So, what we found in later research is you can go all the way down to one-to-three. One-to-three all the way up to three-to one brings in the same amount of money, okay?
Denver: The key word is match. That’s about it.
John: You’re right. The keyword’s match, a hundred percent. Now, it also teaches us a little bit about why people are giving. And through that work and a lot of other work, a big reason why is because of a warm glow that people have; they feel good about their gift. And whenever I talk to fundraising specialists or I give lectures to the community, at this point, a lot of people in the community get angry at me.
And they get angry because they say, Well, John, you’re telling us that our clients are giving because they’re selfish. They want to feel good about themselves. And I say two things. One, feeling good about giving is a good trait in and of itself. Like a lot of people don’t feel good when giving. So, that’s one thing to know that it’s still a good thing that you are giving because you feel good.
Secondly, I say, you need this information because the fact that you know now that a lot of people give to make themselves feel better, you can, let’s say, try new fundraising appeals that will then raise more money.
Now, you can say, Well, give me an example. Okay. State of Alaska reached out to me and said every year: we give people checks, and we ask them to give some of that back for Alaskan wildlife resources and for public goods in Alaska. Okay. They said: design something that we can bring more money in with.
And I said, Well, what do you do now? And they said, Here’s what we do now. We tell people, give a little bit back to Alaska because it’s going to make Alaska great, and it’s going to really help our natural resources. Okay. That’s assuming that people are driven by helping others and making Alaska better.
They might be. I said: How about setting up another drive alongside that that says, Think of how good you will feel if you give back. So, we did that. Guess what? We raised more money.
Denver: Wow. That is really interesting. You know, it reminds me of a study that, I think, Kim Cameron told me at the University of Michigan… it was with MS patients, and there were two groups. In one group, they received a call every week for an entire year to check in to see how they were doing. And the other group, who had MS as well, made the call to someone else who had MS. And at the end of the year, the latter group on every kind of indice you want to measure was eight times better…
John: Wow.
Denver: …than the person who had received the call. And that really is sort of another way of manifesting your point. When we do something like that, and we feel good about what we’re doing, this is not bad, you know. And, as you say, it can be neutral even. If it gets the results to help the cause, these are facts.
So, I mean, everything you’ve said there, the first thing that came to my mind was eight glasses of water. I grew up and you grew up with eight glasses of water until somebody tried to check it. Nobody knows where eight glasses of water came from.
One last thing on fundraising, what’s the impact of COVID on giving habits? Have they changed any?
John: Yeah, good question. So, we’re still looking over the data. I have a bunch of IRS data that looks at giving patterns, at least across people who file. And, a few things kind of jumped out in those data. First of all, the concentration of giving is actually mind-boggling. And what I mean by that is, you know, we all sort of know that the top 1% gives like 25% of gifts. And when I say top 1%, I mean top 1% of adjusted gross income wage earners.
Denver: Right.
John: But when you look inside that 1%, you can go all the way up to like the 99.99 percentile to the 99.9999 percentile, which is the top 1,000 wage earners in the US; they give over 13% of the gifts. So, there’s actually an amazing amount of concentration that is much more concentrated than even income is, and it looks like it’s getting more and more concentrated because of COVID.
That’s preliminary, but that’s kind of a movement. A second movement is what happens across men and women, which is kind of an interesting fact. So, when I look at the IRS data, if you just look at the average gift from the average man versus the average woman, the average man gives like $2,200. The average woman gives like $1,400 per person, per year.
But when you look over the income distribution, at every point in the income distribution, women give more than men. So, you’re kind of wondering what’s going on here. What’s going on is that men are more represented in the deep right tail of income.
So, even though they give roughly the same amount, or women give a little bit more, maybe in the deep right tail, there are just more men there, and that’s what causes the average to go up so much. So, it’s kind of another way to think about just looking at averages is very deceiving. People look at averages…
Denver: Yeah, like the last dollar spent again, you know, it’s the same thing. Yeah.
John: Exactly. People look at average and say, Well, men are more generous than women. No, they’re not. Once you condition on income, it’s the opposite. Women dominate in every percentile of income. And that continues. And these are single men and single women, so I can’t tell you couples, but that kind of continues.
I think, you know, we need to be serious about how we think about taxation, which is always a running conversation. What we find in our data is that men are a lot more price-sensitive than women. And what that means is that they’ll respond a lot more to tax changes than women.
And when we propose new tax laws and new tax changes, we need to be pretty serious about measuring the entities like income effects and substitution effects that really help us understand what will happen to the sector. You know, look, the sector’s a great sector, two, two and half percent of wallet, that’s great.
What I fear though is it’s always been two or two and a half percent since 1970. Even though the sector has grown, the only reason why it’s grown is because incomes have grown, and I really want to see the sector be more innovative, use more science, use more tech to actually grow the wallet share because it’s an industry that’s huge and important, but it really has been pretty stagnant on the innovation sides.
Denver: It has. And I think there are a couple danger signals you just pointed up there. With so many wealthy people giving so much money, you know, in a bad economic time, they will have a disproportionate effect of philanthropy going down because the number of donors in total, I mean, it’s under 50% for the first time.
I also am curious as to how many people are giving outside of the formal 501(c)(3) sector– the mutual fund societies and, you know, those pages that are going up and things of that sort. So, there’s a lot of variations to all these.
John: No, that’s a great point. And I think of not only those, but I also think about volunteerism. And volunteerism is important. It’s not well-understood, but once you include volunteerism, all the informal giving, all the formal giving, I think you’re probably at 9% or 10% of GDP. So, it’s like Wow! You know?
Denver: Yeah, Wow! is right. Finally, John, one of the ideas you have for a next book, and you’ve got several, but you’ve been kicking this one around, is a book on generosity. You said you don’t believe we look at or view generosity in the correct way. How so?
John: Yeah. I can tell your audience that you are a master in background research.
Denver: Well, thank you.
John: If you took one of my courses, you would easily get an A++, because you’re constantly curious, and that’s what wins, right? Constant curiosity. So, yeah, generosity, I think, should be viewed not only in terms of how much have you given, which is kind of typically how we view it.
That’s what we just talked about. We just talked about levels. But it should also be viewed as: What is the opportunity cost of those dollars? And what that means is, you know: How much of what I have am I actually giving? And how much of what I could do in this particular environment am I actually doing?
So, for example, if I set up an experiment and I give somebody $10 and say, you can give between zero and $10, an average person might give $2 to a society or to another person. But if I change that choice set from negative 10 to 10, a lot of those people who gave two will now go to zero or, you know, some of them will stay at two.
But my point is that if you continue to give $2, with the ability to take rather than just give, that’s a different level of generosity than if you were at $2 when it was zero to 10. And that’s what I call the opportunity cost or the opportunity set that we always have to understand… that generosity is not only measured as how much good are your dollars doing.
And that’s important… don’t get me wrong, but it’s also: What were the alternative actions that the giver could have taken part in? And when you start thinking about generosity in that way, it opens up your thinking to what is a generous act. And so, now, if I can take up to $10 from that person, but I don’t, I just give zero and I stay neutral, some people might say, Wow, that was pretty generous.
You have just foregone $10. Now, think about in the workplace– sabotage. And one thing in the area of crime I oftentimes think about is: why isn’t there more crime because there kind of really should be.
Denver: Great question. Yeah.
John: But the social norms kind of teach us not to do it. So, I want to rethink and recast how we view generosity. And I think that really helps us then understand how to promote it, how to set up institutions that can maximize it, and also how to set up the incentives for not only our kids, but also ourselves and our coworkers and our employees. And I think a firm, crisp restatement of what generosity means can really help move us to a higher plane.
Denver: Fascinating. Well, do it. I know you’re kicking around human capital and parenting and some other things. You got one vote right here for the book on generosity. For any listeners who have a scaling challenge, you can make it a whole lot easier simply by picking up John’s book, The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale. Thanks, John, for being here today. It was a real, real pleasure to have you on the show.
John: Thanks so much for having me, and I can’t wait to come back and talk about the next book.
Denver Frederick, Host of The Business of Giving serves as a Trusted Advisor and Executive Coach to Nonprofit Leaders. His Book, The Business of Giving: New Best Practices for Nonprofit and Philanthropic Leaders in an Uncertain World, is available now on Amazon and Barnes & Noble.