Probabalistic Auctions: Why Don’t Universities Raffle off Chair Endowments?

A recent post of mine was addressed to the super-rich who are considering endowing a chair in order to garner public recognition. But what about the merely rich who wish to have their names recognized in perpetuity with an eponymous endowed chair at their university? Is there anything they can do?

Yes. There are two things.

First, a much larger swath of people can follow the Benjamin Franklin strategy and endow a delayed chair. Franklin famously bequeathed about $4,000 in 1790 to the Commonwealth of Pennsylvania. Franklin:

instructed that [his bequest] be invested for two hundred years and at the end of that period, the money should be used to do good. Franklin died in 1790. In 1990, his gift had grown to over $2 million.

Franklin didn’t do this to garner public recognition. He was already one of the most famous people in the world. Instead, his bequest was a poetic way of demonstrating his faith in this country’s future. But the Franklin strategy, which harnesses the power of compound interest, is a means for many merely rich people to acquire chairs so long as they are willing to wait. The less you have to contribute, the longer you have to wait—literally centuries after your death before your acorn trust will grow into a large enough tree to endow a chair. And trusts aren’t administered for free. (As the old joke goes: Q: How do you make a small fortune? A: Give a bank a large one to manage in a trust.)

The Franklin strategy gives people with almost anything to contribute a chance at perpetual recognition – but the recognition might begin so far in the future that no one may have the slightest idea who you are, when the perpetuity begins.

(iStockphoto)

Instead of buying a delayed chair, donors might consider buying a probabilistic one. You might imagine a university or an enterprising intermediary offering a chair raffle. Instead of paying $3 million for a 100% chance of endowing a chair, people could buy a 1 in a million chance raffle ticket for $3 each. As soon as the raffle sold $3 million in tickets, it would hold a drawing and the winning ticket would get to have the chair bear his or her name.

People who can’t afford to purchase a certain chair would for the first time get the chance to purchase a chance at long-lived recognition. Moreover, most people like a flutter. We like the thrill of gambling. I for one would be more inclined to give to a school if my donation automatically enrolled me in a chair raffle. Many professors hold reunion chairs with names like “The Class of 1957 Professor of Law.” But reunion classes might be even more successful at raising chair money if they asked a reunion class to donate to a chair raffle. The more you give, the larger the probability that the chair will bear your name.

The idea of a chair raffle might, however, reduce donations by large donors. It might taint the exclusivity for oligarchs of having their names on elite university chairs if they have to metaphorically associate with the hoi polloi. The donation-reducing effect might explain why schools haven’t (to my knowledge) ever offered a chair raffle.

But there is nothing to stop a third-party from setting up a pass-through charity which runs chair raffles that would be used to create chairs at the school of the winner’s choice. If the winner’s alma mater turned down the gift, a second drawing would be held and the pot would be offered to another school. Yale might not want to offer a chair raffle, but it would be hard put to turn down money if doing so would forfeit the funds to Brown. The intermediary here would be playing the role of Sylvester McMonkey McBean, the “fix-it-up-chappie” in the Dr. Seuss story collection, The Sneetches, who, for a small fee, gives poorer people a probabilistic chance of acquiring an accoutrement of the super-rich. Providing that service might destabilize chairs as a status symbol but, as in the story, might teach us something in the process.

Probabilistic Auction

But the biggest reason why schools should consider embracing chair raffles is to create more competition for naming opportunities. Yeon-Koo Che and Ian Gale saw that optimal auction design is very different when bidders’ ability to pay is less than their willingness to pay. Consider a small college that is trying to auction the naming rights for a new dormitory. Imagine that there is one bidder who has a willingness and an ability to pay $2 million, another bidder who has a willingness and ability to pay $1 million; and 100,000 alumni who have a willingness to pay $5 million, but only an ability to pay $50.

If the school holds a traditional open ascending bid auction, the first bidder will win the naming right by bidding $1,000,001. But the college can earn far more by auctioning raffle tickets to the 100,000 poorer alumni who value the naming right at $5 million and would be willing to pay up to $50 for a 1/100,000th chance at winning the title. By auctioning probabilities, the college unleashes more of the demand that was suppressed by limited ability to pay.

This enhanced competition effect could also be seen if we change the example so that there are only 25,000 alumni with $5 million willingness and $50 ability to pay. Under this alternative, the poorer alumni will collectively bid the auction prices up to $1.25 million. The $2 million valuing bidder will win the auction bidding the highest price to acquire all the raffle tickets, but now at a higher price because of the enhanced probabilistic competition.

I’ve told the story with regard to a small college, but the idea of probabilistic auction might also be applied to the naming rights of stadiums for professional sports teams. Could you imagine how much diehard Lakers fans might have paid for a chance to have the Staples Center named after them? [Or how much Red Sox Nation would pay to keep the hallowed Fenway name if a corporate sponsor loomed?]

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  1. Mike says:

    I have some “questions”/”comments” -

    1) I have a hard time thinking lottery ticket buyers and other gamblers are the type of people interested in immortality – especially of the endowed chair variety.

    2) If anyone can “win” an endowed chair, would this reduce demand from those who can afford one?

    3) If an institution is offering an endowed chair lottery, someone might get the impression that higher education is all about the money. If this is the case, why not make them all for-profit enterprises (and change the laws and the accrediting agencies to make it easier to be for profit)? That would give new meaning to the phrase – “I’ll take organic chemistry for $2000 Alex”.

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  2. robyn ann goldstein says:

    What is an “endowed chair” endowed with. My grandfather, Samuel Harber was “endowed” with a doctorate from a university in Israel. I honestly do not know what it meant to him. I do know that he preferred to give than to receive. Aside from contributing to science, I would prefer honest work to winning the lottery any day.

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  3. Enter your name... says:

    It would also be an interesting way to increase certain types of chairs, e.g., chairs designated for people whose sole job is to teach undergraduates, and whose tenure is determined solely by how good they are at that. I’d cheerfully donate to the creation of such a chair, without any naming opportunities at all.

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  4. Megan says:

    No. As someone has already said this would likely devalue endowed chairs–why would someone want to donate $3million when someone else got the same thing for 3 bucks? Also, when someone does give that kind of money, you aren’t done with them. If you develop a strong relationship with them an additional annual gift of say $25K would not be unheard of.

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  5. John B says:

    Whoever invested Franklin’s money made an approximate 3.1% annual compounded return. Compared to current rates, that is great.

    How is that historically? Considering they had to get through the Great Depression and several recessions and panics over that time, they did a good job.

    However, when you are dealing with a long period of time (like 200 years), a small rate increase means a lot. If they had achieved a 4% return, the fund would have been $8 million.

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  6. Imad Qureshi says:

    No. Not a good idea.

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  7. David Clayton says:

    The Sneetches wasn’t about class, it was about race.

    Nowhere in the story is there any intimation that one group of Sneetches has more money than the other, and at the end of the story none of the Sneetches have any money left at all, each having spent every last dollar trying to be like/unlike each other. Perhaps if the story had been about rich/poor, the poor would have run out of money first, leaving the rich to differentiate themselves one last time by affixing the most fashionable number and style of stars upon thars.

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  8. alex says:

    I love the raffle Idea for fund raising in general. I think this would work for endowments, but i always wonder why other charities don’t take advantage this.

    If i was to run a fundraiser, i would purchase a car and raffle it off for twice the price. with the power of the internet, i am sure you could find 50,000 people willing to pay a dollar for the chance to win a car.

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