Much has been written on the (ir)rationality of purchasing lottery tickets (Eliezer Yudkowsky’s viewpoint is particularly fine), but little has been said on applications of these biases that could improve the finances of all of those who buy a ticket.
Now behavioural economists are attempting to boost the historically poor household savings rate byÂ using our lottery-like optimism as an incentive to save:
Psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called “Save to Win.” Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD* are entered into a monthly “savings raffle” for prizes up to $400, plus one annual drawing for a $100,000 jackpot. [â€¦]
In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.
* CD = Certificate of Deposit (similar to a savings account).