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).
By donating funds to disaster-specific charitable organisations and campaigns we restrict the use of our funds to the relief of that problem only. This can cause long-lasting issues for charities and worldwide disaster recovery efforts in the future.
To ensure the charitable help best, the charitable should ensure they give unrestricted funds that are not earmarked for specific disasters.
[MÃ©decins Sans FrontiÃ¨res] has already received enough money over the past three days to keep its Haiti mission running for the best part of the next decade. MSF is behaving as ethically as it can, and has determined that the vast majority of the spike in donations that it’s received in the past few days was intended to be spent in Haiti. It will therefore earmark that money for Haiti, and try to spend it there over the coming years, even as other missions, elsewhere in the world, are still in desperate need of resources. [â€¦]
The last time there was a disaster on this scale was the Asian tsunami, five years ago. And for all its best efforts, the Red Cross has still only spent 83% of its $3.21 billion tsunami budget â€” which means that it has over half a billion dollars left to spend. Not to put too fine a point on it, but that’s money which could be spent in Haiti, if it weren’t for the fact that it was earmarked. [â€¦]
If a charity is worth supporting, then it’s worth supporting with unrestricted funds. Because the last thing anybody wants to see in a couple of years’ time is an unseemly tussle over what happened to today’s Haiti donations, even as other international tragedies receive much less public attention.
After discussingÂ consumer signalling and Geoffrey Miller’s Spent in hisÂ Findings column (mentioned previously), readers of John Tierney’s Lab were asked,
List the ten most expensive things (products, services or experiences) that you have ever paid for (including houses, cars, university degrees, marriage ceremonies, divorce settlements and taxes). Then, list the ten items that you have ever bought that gave you the most happiness. Count how many items appear on both lists.
Dismissing for a moment the self-selection of the participants and the small sample size, the responses to the question are quite intriguing, showing you what consumer items are worth their cost in terms of ‘happiness’, and what items aren’t.
- Expensive items that don’t significantly contribute to happiness: marriage ceremonies, most cars, boats.
- Inexpensive items that do significantly contribute to happiness: meals with friends, alcohol, books, music, quality beds, pets, bicycles.
- Items that are both (expensive and contributory to overall happiness): education, housing, foreign travel, electronics and sports cars.
Dr Miller’s analysis of the experiment’s trends is worth reading, as is this previous post on the link between money and happiness.
In 2007 the average American saved 0.6% of their income. By February of this year that had risen to more than 4%, but in the 1980s it was 10%.
With this in mind, Tim Harford asks why are we such awful savers, and what can we do to improve the situation?
Behavioral economists [â€¦] have uncovered three reasons why people find it so difficult to save. The first is temptation: Although we often later regret it, we just can’t resist spending. The second is lack of understanding: Our brains can’t quite grasp the profitability of saving. The third is optimism: We believe that everything will work out, even if we don’t save.
The solution offered to counter temptation sounds very similar to the behaviour Ramit encourages in his readers:
[Researchers at UCL] found that imagining a future purchase is almost as good as getting it. For example, when we daydream about buying a new car, our brains respond in much the same way as when we actually make the purchase.
We can harness this buzz to our benefit by discarding vague ideas of “saving for a rainy day” and focusing instead on particular items we need or want. [â€¦] Reinforce this connection in your mind by opening a different savings account devoted to each of your goals: one for a new car, one for a vacation, one for a child’s college tuition fees.
Bruce Schneier comments on the growing prevalence of low-tech currency counterfeiting: “Counterfeits are becoming easier to detect while people are becoming less skilled in detecting it”.
Part of the problem, Green said, is that the government has changed the money so much to foil counterfeiting. With all the new bills out there, citizens and even many police officers don’t know what they’re supposed to look like.
Moreover, many people see paper money less because they use credit or debit cards.
The result: Ink-jet counterfeiting accounted for 60 percent of $103 million in fake money removed from circulation from October 2007 to August 2008, the Secret Service reports. In 1995, the figure was less than 1 percent.
It seemsÂ the EURion constellation isn’t doing its job well enough.