Crowdfunding With Cognitive Limitations

To achieve the desirable funding target in a crowdfunding campaign, the project creator needs to accurately anticipate the pledging behaviors of contributors with practical cognitive limitations. In this paper, we present a study on how the contributors’ cognitive bounded rationality affects the creator’s campaign decisions. Specifically, we consider a two-stage crowdfunding model, where a creator first announces the project decisions (i.e., price and the minimum number of required contributors), and then the contributors choose their pledging behaviors (whether and how to contribute) as they arrive stochastically. We consider the cognitive hierarchy model, where contributors are classified into different levels according to their capability of anticipating other contributors’ behaviors. Surprisingly, we show that the cognitive limitation may improve the chance of project success, especially when the crowdfunding target is high. We prove that with a high average contributor cognitive level, a low funding target, and a low difficulty of motivating the lowest cognitive level contributors, the creator can achieve a close-to-optimal revenue by simply assuming that contributors are fully rational. Otherwise, ignoring the contributors’ cognitive limitations can lead to a significant revenue loss.

I. Introduction

Recent years have witnessed crowdfunding [1] emerging as an effective funding mechanism to develop innovative small projects and products. Instead of relying on large investors, the objective of crowdfunding is to collect enough investment from a large crowd of contributors, where each individual (contributor) pledges a small amount of money, often in exchange for a future product. By interacting with these potential future customers, crowdfunding provides the creator with not only financial support but also useful early feedbacks. The crowdfunding industry is growing rapidly worldwide. For example, on one of the leading crowdfunding platforms, Kickstarter, 37,581 projects raised a total of 730 millions of US dollars in the year of 2020 alone [2].