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Imagine that you have just mailed off a donation to your favorite environmental charity or nonprofit. You have that feeling of satisfaction that comes from supporting an organization that makes an impact by pursuing a mission aligned with your values.

Then you learn that a new entity has begun rating such groups, using a scale of zero to four stars. When you see that your charity received three stars, you pause. Doubt arises. You wonder if something might be wrong with your charity. And, as Bren Ph.D. student Laura Grant has discovered, you will be likely to give less — and may even stop supporting it altogether.

Essentially, says Grant, whose Ph.D. dissertation focuses on the effect information, such as that provided by the star rating, has on charitable giving, “The introduction of ratings reduces contributions.”

CoastlinesIn studying hundreds of such environmentally focused charitable organizations, she found that while previously unrated charities that receive four stars in a new rating system experience little or no change in donations, only about 20 percent of charities are given that highest-possible score. For the rest, the introduction of a rating system reduces contributions by an average of 10 percent, or about $1 billion per year for the 6,000 environmental charities in Grant’s database.

“That’s dramatic,” she says. “It doesn’t mean the dollars disappear, but they do move away from those charities.” And that, of course, affects an organization’s ability to do its work.

So do ratings systems inherently serve as a disincentive to donors? Not always. For instance, gaining a star — moving from, say, three to four stars — tends to increase giving by 4 to 5 percent. “There’s a premium or bonus for one more star,” says Grant, who explains the negative impact of a subperfect score by adding, “When we choose a charity to support, we pick one that we feel good about, so we assume it should be four-star rated. We can only be disappointed by a less-than-perfect rating.”

She explains that star ratings work fine for hotels because customers don’t mind trading quality for cost. “But few want to support a ‘budget’ charity,” she says.

Some were driven to join the Peace Corps by the desire to travel to exotic places, others by adventure, and others by the passion to be of service. Whatever their initial motivations, all leave their Peace Crops service with a profoundly changed view of the world and themselves.

For her research, Grant gathered data on charities rated by Charity Navigator, an organization whose tagline is “Your Guide to Intelligent Giving.” She says that the directors were surprised to discover that their rating system, intended to help donors assess charities, was having the unintended effect of decreasing their giving.

Grant, whose work resides within the general focal area known as “the provision of public goods,” explains, “Basic economic theory asserts that we are self-interested, so why would we provide something that benefits the greater good? The answer depends on the person, but broadly, if we place enough value on the good in question — clean water, species diversity, environmental justice, etc. — or have enough passion for it, we will contribute something for its protection. Giving can also can make us feel good.”

Ratings systems are perceived as valuable because they provide the impression of third-party oversight. Grant gives the example of buying a used car. “Before used-car oversight systems like Carfax and ‘certified pre-owned’ were developed, people were more wary of buying used cars because they didn’t want a lemon.”

With information playing a role in how and why we give, Grant wants to know how it affects whether people give more or less. “We have an implicit sense that more information is desirable, but it’s less clear if and when information becomes overwhelming,” she says.

Human psychology is clearly at work, as is the rating system itself. “Simple information, like stars, may be too coarse,” says Grant. “The easy system may have a disproportionate effect on people’s giving behavior by outweighing other harder-to-measure factors.” One way to address that, she says, is to adjust the performance measure, perhaps by replacing star ratings with short descriptions of the organizations. Charity Navigator had suspected as much and is adjusting its rating rubric, “moving to a more multidimensional assessment that will have more, and more qualitative, measures, such as transparency and leadership.”

This story was originally published in Bren News 2011 Spring issue.

Photo: Top: Ph.D. student Laura Grant

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