The Wisdom of the Crowd

April 22, 2014

Over the last few years, crowdfunding has become a popular business tool. The idea is quite elegant: You bankroll a project by raising small amounts of money from a variety of sources. Seems simple enough, right?

But as Assistant Professor Gordon Burtch has discovered, crowdfunding is a highly nuanced activity, one that operates under a unique set of rules which are often governed by group think-style forces.

His research considered a core question: How does an individual's ability to see what others have given affect his or her decision to invest in a crowdfunded venture? He notes that there are two characteristic responses. "Some people give in kind--if someone else has given a specific amount, they'll do the same," he explains. "The other is substitutive behavior. If I see someone else has given X-amount of dollars, I'll withhold my donation, figuring that the project doesn't need my money anymore."

Burtch observed approximately 100 crowdfunded online freelance journalism projects to scrutinize the impact of those attitudes. He found that substitutive behavior proved common. "The crowd appeared to be fair, allocating money to the campaigns that were more in need of funding," he says. "And if donations spiked to one campaign, the crowd would withhold further donations from it."

Knowing that substitutive behavior drags out the process provides additional insight into how to craft a campaign. "If no one knows about my project, substitutive behavior is desirable, as it gives me time to build buzz," Burtch notes. "But if I'm an entrepreneur with an established following, building awareness may not be that important, and I can focus on raising money with a shorter funding duration to ensure I don't lose my momentum."

Burtch adds that lesser-known companies should use marketing and social media tools to create that buzz. "Companies may also want to define the duration of a crowdfunding campaign based on how important buzz and awareness will be to the effort," he adds.

"An Empirical Examination of the Antecedents and Consequences of Contribution Patterns in Crowd-Funded Markets" Burtch, G., et al., Information Systems Research, (Sept. 2013)