With a Lottery Option, Saving Is Easier

Back in 2010, we put out a two-part podcast (Part 1; Part 2) about Prize-Linked Savings (PLS) plans, which combine the safety of a savings account with the thrill of a lottery payout. It is one of the most intriguing ideas we’ve run across in some time. Maybe not earth-shattering, but potentially an important way to help people save more money.

Now a group of scholars (including the University of Maryland economist Melissa Kearney, who was featured in the podcast) have put out a working paper (abstract; PDF) that set up experiments to determine whether a PLS plan would actually induce better savings behavior. Their answer is yes:

This paper presents the results of a laboratory experiment designed to investigate whether the option of a Prize Linked Savings (PLS) product alters the likelihood that subjects choose to delay payment. By comparing PLS and standard savings products in a controlled way, we find strong evidence that a PLS payment option leads to greater rates of payment deferral than does a straightforward interest payment option of the same expected value. The appeal of the PLS option is strongest among men, self-reported lottery players, and subjects with low bank account balances. We use the results of our experiment to structurally estimate the parameters of the decision problem governing time preference, risk aversion, and probability weighting. We employ the parameter estimates in a series of policy simulations that compare the relative effectiveness of PLS products as compared to standard savings products.

The authors are  Emel Filiz-Ozbay, Jonathan Guryan, Kyle Hyndman, Melissa Schettini Kearney, and Erkut Y. Ozbay.


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You've published several pieces on this intriguing idea. Is it convincing enough to you that you've gone to the trouble of finding a place where you can use prize-linked savings, and actually put some of your own money into it?

Radek Urban

And I always thought Americans were ahead of us! This is a tested and trusted idea in Central Europe. RU

lototto

how about lottery tickets and food shopping? put lottery rickets in low fat food to encourage people to eat healthy

Ross

Buying the food and eating the food are two very different things.

Jackart

This looks like the Premium Bonds issued by the State-Owned British National Savings and Investments.

It's seen as a sensible lottery for your granny, who'll buy them for grandkids. Biggest Payout £1m each month.

Arnoldo

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