Optimism as Incentive

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 by 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. […]

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.

via Techdirt

* CD = Certificate of Deposit (similar to a savings account).

5 thoughts on “Optimism as Incentive

  1. Paul

    Yeees. The cynical side of me say “Why don’t they just offer decent savings rates instead?”. Also, are financial institutions permitted to run lotteries in the US? When they go bankrupt it certainly seems so.

  2. Lloyd Morgan Post author

    I’d like to think that simply raising the interest rates of savings accounts would increase overall household saving, but the cynic in me doesn’t believe it.

    Even in the UK, where we have fairly good savings account interest rates, the household saving rate is still historically only double that of the US (2.5% gross last year to the U.S.’s 1.2%, according to OECD Economic Outlook data).

    I believe that the majority of people, and especially those for whom saving would be extremely beneficial, are innumerate. As soon as they see a percentage symbol next to an interest rate they lose interest in favour of spending huge sums on a lottery where the result of winning is abundantly clear: £££.

    Want the public to embrace your financial product/savings/current account? Don’t provide them with an interest rate percentage, tell them how much they can earn, in real terms, with your account. Well, that’s my opinion, at least.

  3. Lloyd Morgan Post author

    Greg,

    In fact schemes like this have been around at least 14 years before your assertion of 1970, too.

    The U.K.’s Premium Bond scheme was started in 1956 and is a standard lottery bond.

    However are you aware of such schemes being available in the United States–where the program in question was created and where this piece was penned?

    There’s no doubt it is a “clever program”, but maybe the “devised” part is dubious.

  4. Lloyd Morgan Post author

    Paul,

    Interestingly, some more information has come to light on exactly this issue.

    From The Washington Post via Nudge:

    One manager explained that the lottery style bank account proved more successful than a short-term CD with a 10 percent interest rate.

    So a decent interest rate doesn’t work. People amaze me every day!

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