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One of our favorite things to do on this show is present a new idea, or maybe a new way to think about an old problem. Way back in 2010, the first year we made Freakonomics Radio, we did such an episode. Unbeknownst to us, one of the people who heard it was so inspired by the idea that he would spend much of the next seven years turning it into something real.

Michael GAUDINI: Knowing that this had been a podcast that turned into an idea that ended up becoming a constitutional amendment and that I had a piece of that thing that had happened. It was just super exciting.

That’s Michael Gaudini.

GAUDINI: Yeah, and I am a policy adviser with the city of Austin.

In 2010, he was a 21-year-old college senior in Pennsylvania, interning in a state legislative office.

GAUDINI: And I was really trying to get involved more in public policy at the time and I listened to the Freakonomics podcast on prize-linked savings and I thought it was a really cool idea that was pretty common sense.

What, you may be wondering, is “prize-linked savings?”

GAUDINI: So a prize-linked savings account is basically just a savings account in which you’re incentivized to put more money into your savings account.

The incentive comes in the form of cash payouts. Kind of like a lottery but unlike a lottery in that even if you don’t win, you still have your principal.

GAUDINI: We kind of wanted to harness the same type of feeling that you get when you play the lottery. And I thought that it just made sense and had the potential to have a broad spectrum of support no matter what part of the aisle you sat on.

Gaudini happened to sit on the Democratic side of the aisle – first in Pennsylvania, where he pitched the idea; and then when he moved to Texas to work in the state legislature there. He was patient, and stuck with it through the very slow political process. Finally, this November, it was on the ballot in Texas.

GAUDINI: Proposition number seven was an authorizing amendment that would allow banks and credit unions in the state of Texas to offer prize-linked savings accounts as a savings option for folks that have accounts there. And it passed by a pretty solid margin. I think it was something around 60 percent in favor. And so here we are today.

So here we are today. We thought, therefore, it might be nice to replay for you the original episode that inspired 21-year-old Michael Gaudini. Who knows, maybe you’ll be inspired to do something with it …

There’s something Peter Tufano wants to know about you: If you had to, could you come up with $2,000 in 30 days? That’s the question he asked a whole bunch of people in 13 countries, including the U.S.

Peter TUFANO: Why $2,000? ‘Cause an auto transmission is about $1,500. Most estimates of what everyday emergencies are about are in that order of magnitude, if you were to have a sick or ailing relative on the other side of the country and you had to buy full-price plane tickets, it could easily be that amount.

And then, why this language “come up with” as opposed to “save?” Because we wanted to see if people had access to resources between savings and credit, and friends, and family. About half of Americans are not able to come up with $2,000 in 30 days, which means that they stand only one emergency or crisis away from really quite dire circumstances. This isn’t picked up in the national economic statistics; this is picked up at a much more local level, at a much more intimate level of what happens inside families. It’s this lack of savings, as it were, that motivates me.

Tufano is all about the motivation. He’s a professor at the Saïd School of Business at Oxford and one of his specialties is consumer finance. He wants to know how many checks you write, and for what; how much you borrow, and why. And he wants to know how much you spend on beer, on toys — or on lottery tickets.

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Americans are generally terrible at saving money. Think about what Peter Tufano just said — half our country doesn’t have enough money in the bank to survive one breakdown. And it’s not just poor people. In Tufano’s survey, only 25 percent of the people who earn between $100,000 and $150,000 a year could come up with that $2,000 in 30 days. We are, however, excellent at spending money. Houses, cars, clothes, books, electronics — and lottery tickets. Households that play the lottery spend on average about $1,000 a year on tickets — that’s more than a typical household spends in grocery stores, on dairy products and beer combined. This year, Americans will buy about $60 billion worth of lottery tickets. The other day, I went to a store at Penn Station in New York called Carlton Cards. It’s pretty big. In the back are rack upon rack of greeting cards and some candy bins. But there weren’t any customers back there. All the customers were jammed up front, at the lottery counters. According to the New York State Lottery, Carlton Cards sells more lottery tickets than any other store in New York. Kirit Prajapadi is one of the managers. I asked how much lottery revenue his store does in a year.

Kirit PRAJAPADI: It’s about $8 to $9 million a year.

DUBNER: Holy crap! $8 to $9 million a year in lottery sales in one store in Penn Station.


DUBNER: OK, you see people buying tickets all day. You see winners a lot. Tell me how excited they are when they win.

PRAJAPADI: When they win, they forget about all those losses. And they get excited, like they win something. Whatever they lose, they just care about their win.

DUBNER: They give you a hug? Give you a kiss?

PRAJAPADI: Not really. Just handshake probably sometimes.

DUBNER: You probably don’t want the hug or the kiss.

PRAJAPADI: No, not really.

Melissa KEARNEY: When I was in graduate school there was a local little store by my graduate student-housing unit, and I would stop there on the way home and pick up milk and orange juice, and notice lots of people buying lottery tickets.

This is Melissa Kearny. She teaches economics at the University of Maryland.

KEARNEY: So I just sort of started chatting with the vendor, and he said, “Oh I have people coming in and spending hundreds and thousands of dollars on lottery tickets a month, a year.” And so being a graduate student, I just downloaded some data and started playing around, and was struck. In particular, people do spend a lot of money buying lottery tickets. So it was just sort of a passing curiosity really. I started wondering about what were they not buying in order to buy lottery tickets.

DUBNER: So let’s walk through some of the numbers in lottery gambling. In the U.S., how many people play the lottery?

KEARNEY: Half of U.S. adults surveyed said they played the lottery in the past year.

DUBNER: And would that make it the most popular form of gambling in the U.S.?

KEARNEY: Yes, by far. So two out of three American adults report gambling, and 50 percent say they’ve played lottery, and the next closest is casino, which is about one in five adults.

Why do so many people play the lottery? Because it’s fun! For a dollar or two, you buy the chance to dream. Big. This remarkable bargain illustrates a phenomenon — a probabilistic oddity — that economists call “skewness.”

KEARNEY: That’s the idea that there’s some big prize way out there that corresponds to very small odds, but there’s some potential of capturing that. And that’s what your typical money market account can’t give you. So you could have $1,500 in your money market account, and every month you might earn a dollar on it. But there’s no chance in any month that you’ll earn $100,000 or even $10,000.

DUBNER: Now, I know as an economist you’re not trained to answer this question, but as a human being, tell me, why is skewness so important to us?

KEARNEY: That’s the chance of changing your life, right? That’s the return, that’s the big-win outcome that might allow you to buy a beach house, or to send your kids to college. If it’s less far out in the distribution that might be what you need to make a down payment on a house, or buy a car, or throw your daughter the wedding you want to throw her.

For a lot of people, skewness has an irresistible appeal. And so, a handful of researchers like Melissa Kearney are trying to harness its power — the unlikely chance of changing your life with a big prize — to solve America’s low savings rate. The idea is a new financial product that combines the thrill of the lottery with the goal of, say, accumulating more than $2,000 in a savings account. So that a broken transmission doesn’t become a full-blown crisis. Here’s Kearney’s pitch.

KEARNEY: So we know Americans like gambling. They always have, the majority of them do it, and they’re going to keep doing it. And so what we do is take seriously the idea that people want some small chance of winning a large sum of money. That market, that asset is missing from the American landscape.

Low-wealth individuals — the only asset available to them that gives them some chance of accumulating a large amount of money, is the state lottery. And in fact, a recent national survey of a thousand adults, one in five American adults said their greatest chance of accumulating hundreds of thousands of dollars is through the lottery. That number jumps to 40 percent for folks making less than $25,000 a year.

So a lot of Americans think the lottery is their only chance at winning big sums of money — why don’t we take that appetite for gambling, for a product like this and attach it to a savings vehicle that offers some positive return? It’s a win-win situation.

That win-win situation, and the chance to make it happen in the U.S., has generated a lot of enthusiasm among economists like Kearney and Peter Tufano. He’s the man who’s been researching what are called “prize-linked savings,” or PLS, all over the world.

TUFANO: I started in the U.K. because they have a product called “premium bonds” which has been around for about 50 years, a little bit more. And where the government offers a savings product to investors which, at first glance, would almost look perverse: Give us your money, and we promise you no interest.

But that’s not quite how the program works because it’s give us your money, you can take your money out at any time, and each month we’re going to basically take the interest pool and we’re going to lottery it off so that one lucky person will become a millionaire and literally every month someone in Britain gets a knock on their door from Mr. Millionaire who tells them they’ve won the million pound prize.

There are over 100,000 other people in the U.K. who have found out they’ve earned smaller prizes. This was an intriguing concept and so the research that I’ve done tried to understand: Was this more like gambling or savings? Bottom line: It’s both. Then this travel took me to South Africa where I met Robert Keip, and he was creating a product call MAMA, the Million a Month Account, and I think in a phrase he described the entire economics and in some sense the value proposition for savers quite simply: “Everything to gain, nothing to lose.”

It’s a savings account where you can take your money out when you’d like. You always have access to your principal and it will never go down in value, you may come out with a little bit of interest, but you might come out with a remarkably large payment. But you can only go up and you can never go down. And then, in respect to the extensive work on behavioral economics and behavioral finance, the logic of this product is quite obvious.

People have what we call loss aversion, they much prefer to protect against losses than to worry about gains, they tend to misestimate small probabilities, but when you put it all together, in very plain English, people would rather have a small chance at a life-changing payout, than an almost certainty of a pittance. So I can be guaranteed in this interest-rate environment to put my money away and maybe be able to buy a coffee with the amount of interest that comes off my $100 account. Whereas, I’m willing to say I’ll give up that interest but there’s some possibility, remote as it might be, that I might be able to have a life-changing payout — an amount that would allow me to buy a car, or a house, or even more.

So this preference for highly skewed payoffs or the kind of payoffs that would normally be present in gambling or lottery products, when combined with savings, turned out to be tremendously effective around the world. But it was completely absent for legal reasons in the United States.

So, what are those “legal reasons?” As Tufano discovered, state law typically prohibits something like a prize-linked savings account because it’s a lottery and, according to state laws, the only legal lottery is a lottery that is run by the state itself. Nice monopoly if you can get it, right? You can hardly blame states for keeping lotteries to themselves. They generate billions in revenues. And so, while most states might like to help their citizens save more money, they may not be willing to pit their own lotteries against ones that might be run by, say, a bank. But as Tufano discovered, in the state of Michigan there was a loophole. In 2009, he got a group of credit unions to pilot the idea. Here’s Dave Adams, CEO of the Michigan Credit Union League.

ADAMS: You know banking can actually be pretty boring. It’s not like we go to social events and talk about how much we’re saving and talk about a great new feature on our checking account. Banking services are pretty mundane. So what people want and need is a fun way to save, and in Michigan we’ve come up with what we think will accomplish that.

It’s a program called Save to Win. And what it is, is using a lottery concept, so for every $25 that someone puts into these one-year certificates of deposit, they are going to get a chance at cash prizes. And the cash prizes are given out every month by participating credit unions ranging from $50 to $500. And there’s a grand prize at the end of the year, an opportunity to win a $100,000 grand prize. So Save to Win gives people what they need, which is, they need to save more, while giving them what they want, which is a fun way to do it: a game of chance that makes it interesting to save.

DUBNER: Something that you will want to talk about at a party, say, “Hey, I won a hundred grand!” So you’re making savings sexy by introducing a lottery element.

ADAMS: I think so, I don’t know so far as to say that it’s sexy, but it’s certainly far better than talking about the point-five percent that I’m getting on my savings account at the bank. So now you’re getting a competitive interest rate. You’re doing what you know you need to do, which is be more responsible in the way that you save and plan for the future. But you’re getting a chance at these cash prizes including a chance at a $100,000 cash prize. And the odds of winning are much better than what you would see if you were buying lotto tickets.

Even with the sputtering 2009 economy and low interest rates, a handful of credit unions in Michigan opened 15,000 new savings accounts. We spoke with the first big winner of the Save to Win program, 87-year-old Billie June Smith.

DUBNER: So you put $75 of your own money into a credit union savings account. And as a result, you were entered into a lottery for which you won $100,000.

Billie June SMITH: Right.

DUBNER: Well, that sounds like a pretty good deal to me. What do you think?

SMITH: Well, it is! It has helped me a lot.

DUBNER: Tell me what you’ve done with the money, Billie.

SMITH: Well, I’ve had to replace the furnace just a month ago. And I’ve put in water softener. And I have put money aside for the taxes. And I have another savings that I don’t touch for just so long. And I can add to it then.

When Save to Win surveyed some of its customers, they learned that more than 60 percent of them had either played the lottery or gambled in the previous six months. Fifty-five percent, meanwhile, had had no savings plan. Save to Win was beating its goals, and reaching the customers it was supposed to reach. It makes you wonder what would happen if a program like this took over an entire country.

Robert KEIP: Well, my name is Robert Keip. I worked at First National Bank for 11 years, where I headed the Investment Product House, which was a business unit that really focused on retail deposits, both consumer and corporate deposits. And our focus was trying to look at ways of growing the funding base of the bank.

First National Bank, or FNB, is in South Africa. In 2005, it started what would turn out to be a phenomenally successful prize-linked savings program. It was born out of South Africa’s financial problems, as the country struggled to put the apartheid era behind it. Millions and millions of black South Africans did not use banks for anything. Robert Keip wanted to find a way to get some of them in the door.

KEIP: Now in South Africa, because so much of the population is unbanked, so much of the savings are literally sitting under mattresses. Now, this has got a double effect: The one that really does really do badly is that it removes that funding from the mainstream banking environment so it can’t be harnessed to lend out and fund economic growth because retail funding tends to come from consumers and then get lent out to businesses who can then create jobs. That was the one problem.

The second problem was really that these people with the money without bank accounts were excluded from the banking system and by being excluded by the banking system you miss out on so many benefits that really help with people’s individual development. For example, developing credit records, being less exposed to having your money stolen or lost on the way home.

But Keip’s bank had a problem. Interest rates at the time weren’t keeping up with inflation, so putting your money in a plain old savings account might actually erode its value. Keip’s job was to make it worthwhile for customers to deposit new money. So instead of simply offering an account with a scrawny interest rate, he’d offer an account with practically no interest at all — but: It came with the chance for a really big payday.

KEIP: So what we did, we literally pooled all of these little point-two-five percents of interest. And then what we did is we paid out that interest in lump sums to a few people. So we paid out 150 people a month in lump sum prizes. So the first prize would be a million rand, which is an enormous amount of money in South Africa. And then there were three prizes of 100,000 rand. And then we went down to 20,000 rand, and a few prizes of a 1,000 rand. So really what we did is collected the little bits of interest that would be paid on all these little accounts and then paid it out randomly to a few select lucky winners.

DUBNER: So let’s say I live in South Africa. I take the money I’m earning and put it under my mattress or maybe buy some high-risk equities. You’re offering me the security of a bank account and the excitement of a chance to win a million rand. And what did you call this idea?

KEIP: We called it the “Million a Month Account.”


KEIP: And MAMA became the trivial name for it.

DUBNER: And you’re the man who gave birth to MAMA.

KEIP: Yes.

DUBNER: And how successful was MAMA?

KEIP: Hugely. Probably too successful for its own good.

MAMA attracted more than a million new customers to Keip’s bank. Other banks in South Africa took note — and they complained to regulators. And then came the South African State Lottery.

KEIP: Well, we engaged with them before we launched. We wrote to them and asked them their opinion on the product. They wrote us a letter back saying that they didn’t think it was a lottery; they thought it fell into a promotional competition part of the legislation — and that suggests we should just comply with the requirements of promotional competition. And we launched and nothing was heard from them for six or so months, then they contacted us to say actually they don’t like what we’re doing and that they think that it’s a lottery now.

DUBNER: So when you were starting out and there was very little money in your coffers, they thought it wasn’t a lottery. But then after it got going for a while, and you had, how much? A couple hundred million dollars?

KEIP: About $200 million. By the time we closed down. But more importantly it was over a million customers that we had brought in.

DUBNER: And the National Lotteries Board changed its mind then. It thought: “Oh, that thing that we said a little while ago was not a lottery, now looks a lot like a lottery.”

KEIP: Yes.

DUBNER: What did they do then?

KEIP: We first engaged with them and tried to discuss it but it was very clear that they were in no position and not wanting to even try to discuss what the issues were. And so they took us to court to have us closed down.

Hugh Melamdowitz is the man who took MAMA to court. He’s the lawyer who represented the South African National Lottery. Melamdowitz argued that First National Bank’s MAMA program infringed upon the state lottery’s right to be the only game in town. The case went all the way up to South Africa’s Supreme Court of Appeals, and Melamdowitz won every time.

DUBNER: Hugh, you must be very good.

Hugh MELAMDOWITZ: I can’t answer that.

DUBNER: Now, when MAMA was created, about 70 percent of low-income South Africans were said to be “unbanked.” The government was eager to cut this number. MAMA made it easy to get people in the bank. All they had to do was deposit a minimum of 100 rand, or about $15, into a 32-day “call” account — what we’d call a certificate of deposit. So, what’s wrong with that?

MELAMDOWITZ: Well I suppose it is an inducement to bank, but for the period in which your money is deposited in the bank you do not receive any interest. South Africa has a relatively high interest rate. Part of the motivation around the account was touted as being a no-cost account, which was correct, but also there was no interest earned.

In South Africa on a 32-day call account your interest rate is fairly substantial. So for the days when your money wasn’t earning any interest whilst it was sitting in the bank accounts and the bank was earning substantial sums. I think the idea was that it was driven towards the unbanked hence the minimum amount of 100 rand. But realistically, substantial amounts were being deposited into accounts with the chance of affecting the million rand return.

Now, how successful was the savings plan run by FNB in actually drawing in money from either the previously unbanked or citizens at large. How much money did they take in, in what period of time?

MELAMDOWITZ: Well there was substantial money taken in, not necessarily from the unbanked. My understanding is that substantial funds came from their regular customers. And really the customers who had sufficient means that they had essentially free money sitting around that they could afford to put aside for the 32 days without effecting any return, or any real return.

So my understanding is that the funds were deposited not predominantly by the unbanked, but really predominantly by the banked, and I would imagine predominantly by the more wealthy customers. The return that the bank made was fairly substantial.

Melamdowitz’s argument seems a bit at odds with itself. He says the bank took advantage of people by failing to give them a high interest rate — but also that most people who bought into MAMA weren’t the unbanked, that they were wealthier customers who had, as he puts it, “free money sitting around.” Well, if they want to play the bank’s lottery instead of the national lottery, why shouldn’t they be free to choose? But Melamdowitz was doing his job: protecting the interests of his client, the National Lottery. And it worked.

MAMA was shut down. Robert Keip, the man who created MAMA at First National Bank, stands by its success. He says the excitement of the lottery payout got people in the door so fast that the cost of acquiring a new bank customer fell from $300 to $5. But that was MAMA’s goal in the first place — to expand banking. Keip says 20 percent of MAMA accounts were opened by people who were previously unbanked. Sure, it wasn’t the majority, but MAMA reached that level in just the first three years. And it took in $200 million in deposits. After MAMA was shut down by the national lottery, Robert Keip was invited to Washington, D.C., to talk to federal banking officials about the program’s success.

Coming up next: When you play a state lottery, the state likes to keep quite a bit.

KEARNEY: Oh yeah, it’s a lot of money they take off.

And: Has the U.S. Treasury Department thought about breaking up the state-lottery monopoly?

BARR: One of things that I’ve learned in my role at Treasury is that picking fights that one doesn’t have to pick isn’t the wisest course of action .

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Today we are revisiting an episode from the deep archives of Freakonomics Radio, from 2010. Because one listener who heard it way back then, Michael Gaudini, took the idea and spent seven years working to make it a reality. He finally got his way, this past election day, when Texans passed a state constitutional amendment allowing credit unions and other financial institutions to offer prize-linked savings accounts. Why did such a relatively simple idea require something as drastic as a constitutional amendment?

GAUDINI: So in the state of Texas, the state basically had a monopoly on lotteries. And because this was considered a lottery, it could not go forward without an amendment to the state constitution.

It’s hard for anyone but the government to run a lottery when the government thinks the only lottery should be run by the government itself. And that has been the biggest obstacle to bringing PLS plans to the United States. The biggest lottery in this country is run by New York State, which today generates more than $9 billion in annual sales. But in order to get there, New York — like most states that have a lottery — had to rewrite its existing laws that prohibited any kind of gambling. Here’s former New York State lottery director Gordon Medenica.

MEDENICA: New York first began in 1967, and it was the second state after New Hampshire to come in.

DUBNER: What was the original impetus? Was it a budget shortfall essentially? Did the state feel we need money; we can void this ban on gambling in the state and come up with a way to do it?

MEDENCIA: I think it was both a desire to raise money, and also I think it was a recognition that playing was going on anyway. And it was an attempt to tax and regulate an activity that they knew was very common among citizens. And whether you go back to the numbers games that existed in urban areas, and quite frankly still exist, or those kinds of activities, and even sports betting today, which of course technically is illegal but we all know is a huge business, I think it was a recognition on the part of lawmakers that much like prohibition, better to tax and regulate than to ostensibly call something illegal and pretend it doesn’t go on.

State governments do more than tax and regulate their lotteries. They take a generous cut themselves. In gambling circles, the commission taken by whoever operates the game is known as the “rake.” With state lotteries, the rake can be as high as 60 percent. That means that as little as 40 percent of the money taken in from ticket sales ends up in the pool that pays the winnings. The rest of the money usually goes to education (it’s an extra tax for schools, but paid for only by people who play the lottery) and it goes to cover overhead, marketing, and sales commissions. Compare the lottery’s rake to the slot machines in a casino: They pay out more than 90 percent.

KEARNEY: Oh yeah, it’s a lot of money they take off.

That, again, is the economist Melissa Kearny.

KEARNEY: States ostensibly run the lottery, at least initially it was, let’s provide an alternative, legal lottery product or numbers product to the illegal groups, it will be transparent, it won’t be corrupt. But then they declare themselves monopolies and they take a big cut, which we can think is a really high price. Consumers are paying a very high price to buy this type of product. They can’t get it from anywhere else legally. And then the lottery commissions have the mandate to increase revenues. So they innovate, they advertise, they market. They behave like monopolists.

What do we know about people who play the lottery? What’s, for instance, the socioeconomic breakdown?

KEARNEY: Ok, so this surprises a lot of people, but people throughout the socio-economic distribution play the state lotteries. So it’s roughly 50 to 60 percent of men, roughly 50 to 60 percent of women, roughly 50 to 60 percent of people across the education spectrum; so high school dropouts, high school degrees, college graduates.

When you look at the absolute dollars reported spending, it’s not that different across the income distribution, so it’s lower income households spend about as much in dollar terms as higher income households. The flip side of that, of course, is that it winds up being a larger share of lower-income households’ total spending.

So states have a monopoly on lotteries. And the people who can least afford to play — the people in the survey Tufano conducted who can’t raise the $2,000 when their furnace dies — they buy just as many tickets as people who make a lot more money. The lottery’s rake is so big that you can reasonably expect to make only 50 cents for every dollar that you pay in. And that’s why Peter Tufano and his colleagues are backing prize-linked savings in the U.S. And yet, for now it’s illegal.

Peter TUFANO: I think the reason that this product exists elsewhere and not here is because of the, I don’t want to say accidents of history, but the path that history has taken in America over a long period of time. I’m not a banking expert, nor am I a lawyer, but it’s been explained to me that the prohibitions on banks engaging in lottery activities goes back to the 1930s when for whatever reason, the activities that some banks pursued made regulators very nervous about them having anything to do with the lottery, which is why you can’t walk into a bank and buy a lottery ticket. And so, that may have been a really smart legislation back then and it might still be smart legislation now but it seem to have in this instance thrown out not only lotteries but also savings programs that have chance elements to it.

So that’s half the equation. The other half of the equation is that as a public finance matter. Americans states and localities have relied on lotteries as a way to close public finance deficits. There are other ways to close those deficits but unfortunately they’re going to be quite large looking to the future. But when public entities were given the right to use this vehicle to raise funds, other parties were prohibited from using the same vehicle and therefore there are prohibitions against private parties running lotteries in virtually every state.

So the combination of laws to try to protect the safety and soundness of banks and the laws to permit states and local governments to have a kind of preferential access to this form of funding has led to this situation where this product, which no one ever meant to outlaw, has become outlawed.

It makes sense that a state-run lottery might see a prize-linked savings plan as a natural rival. But the New York State Lottery, for a little while at least, actually considered teaming up with Peter Tufano on a PLS plan. Gordon Medenica again.

MEDENICA: We called it a no-lose lottery ticket. And basically what the concept is, is you buy a ticket, it would be an expensive ticket, let’s say a $100, but you can never lose the base of it. Then we pool those funds, invest them just like mutual fund or anything else like that, and then the investment gains become the prize pools.

Every month or so, instead of earning almost zero percent on savings accounts, there’s a lottery and different account holders win prizes just like you would with a lottery game. So, we went through a lot of this research and we went to the FDIC. And this was an FDIC committee on trying to encourage a higher savings rate among low-income people, and also to embrace what they referred to as the unbanked, and to get low-income people to use banking facilities and financial services better.

Medenica says he couldn’t make the math work out for the New York State Lottery. But for the Florida Lottery, it’s not about the math; it’s about the law. I asked Leo DiBenigno, the former Florida Lottery Secretary, what he thought about a prize-linked savings plan.

Leo DIBENIGNO: From a purely lottery perspective, I think the Florida Lottery is the only entity in Florida that can operate a lottery game. So if what you described is legally a lottery game, then I’ve got to say that it probably sounds illegal under current Florida law.

States protect their lotteries because the lotteries bring in lots of money for the states. Some money goes to education, and other worthy-seeming causes. But even DiBenigno admits that’s not what motivates people to play.

DIBENIGNO: I think people — Floridians in general — are players. They like the idea that the money they spend on the lottery, that a proportion of it and, in this case, a significant portion does go to fund education. But I’m the first to say that they don’t play the lottery by-and-large to help fund education in Florida. People play the lottery to win. They like the prizes, they like the excitement, they like the fun, the possibility of winning — you know, sometimes $10, $20, $50 and sometimes many multi, multi millions of dollars. I think the funding to education is ancillary. It’s an extra bonus that the public views the lottery as a different and unique and fun way to be able to fund at least some of things that our education system needs.

The lottery has famously been called “a tax on the stupid” — you get terrible odds, and the state rakes off a huge amount, converting your hard-earned cash into an additional schools’ tax. Now, you can understand why a state lottery commissioner like Leo DiBenigno of Florida likes things the way they are. But what about the other government officials who work on things like consumer protection? What about someone like the former Assistant Secretary for Financial Institutions at the Treasury Department? His name is Michael Barr. I asked Barr if he ever played the lottery.

Michael BARR: I haven’t really played the lottery. I think probably if I went back over my 45 years I may have bought a scratch ticket or two in my 20s.

DUBNER: Now why do you not play the lottery?

BARR: It’s a fool’s errand. As you undoubtedly know, there are a handful of people who will make some money out of the lottery but most people most of the time will lose money. It’s not a great way of spending one’s scarce resources.

DUBNER: I don’t know if you’re aware of the pilot program that’s been happening up in Michigan with credit unions where a prized-linked savings program is actually under way — are you familiar with that at all? Called the Save to Win program?

BARR: I have not actually studied that.

DUBNER: So the folks who are trying to make this happen come up against a very simple reality, which is that it’s typically illegal. That a private institution like a bank or a credit union is not allowed to run a lottery according to state law. State law typically forbids gambling and in order to allow a state to run a lottery itself, there’s a loophole that must be written, and those loopholes have been written — most of states do have their own lotteries. But for someone else to come in and do it, it would be illegal.

If you looked at the landscape and thought, in my role in the Treasury here I would like to encourage people to save more, I’d like to make it worthwhile for them to save more, and I’d like to remove barriers that prevent from participating in projects that let them save more, would you be in favor of sponsoring or trying to get rolling some legislation that would allow for a widespread deployment of prized-linked savings? Do you think that’s something that Treasury should get its momentum behind?

BARR: One of things that I’ve learned in my role at Treasury is that picking fights that one doesn’t have to pick is not the wisest course of action unless it’s something that’s absolutely essential to take on. I wouldn’t have put that in the category of high priorities to wage into a discussion of state gaming law.

DUBNER: But if your job is to help American families save more and be better financial stewards generally, and we know that tens of billions of dollars are being spent on lottery tickets every year, which you called a fool’s game, and one alternative is to offer bank savings accounts whereby a customer can put in $100, enter a lottery, maybe win, but probably not, but maybe, and keep the $100, why isn’t that something that’s worth considering even in a politically fractious environment when the potential benefit — getting people to save more — seems to be much larger than the potential downside of angering some state lottery commissioners, let’s say.

BARR: I think there are lots of different ways of encouraging greater savings among all American families and I think we should continue to innovate and try new approaches. I think that the question that you posed is potentially one aspect of one way to do that. I don’t think we yet know enough from the research to say that it’s the kind of thing that we think needs to happen on a wide scale in order to be effective and I think we have a number of potential strategies to help meet the needs of American families to save that we haven’t really fully explored and that maybe raise a somewhat lower set of issues and barriers.

All right, so the prize-linked savings idea may not be universally beloved. But up in Michigan, they like it fine. And in fact, since 2009 when Michigan became the first state to allow PLS accounts, more than 20 states have followed suit — with Texas, as we’ve been hearing today, being just the latest. Now, maybe you think this is a terrible idea. Maybe you think people ought to save money on their own. But you know what? We don’t. People respond to incentives and for a lot of us the incentive to save — for retirement, for emergencies, for whatever — is weak.

Why? Well, because the payoff is abstract, and it’s too far in the future. It’s the opposite of “skewness.” This dilemma doesn’t just apply to saving money. Think of a school kid, a third- or fourth-grader. You want me to do what? To bust my butt in school for 10 more years and then go to college just to get some job that I probably won’t like?

Or think about crime and punishment. If you look at the data, it turns out that the death penalty does not work as a crime deterrent. Why? Because as it’s currently practiced, with the punishment waiting so far out in the future — through a maze of delays and appeals — the incentive simply isn’t strong enough to stop me from pulling the trigger right now.

Sometimes you need stronger incentives. Or maybe some good smoke and mirrors. That’s kind of what a prize-linked savings plan could offer. In a country where it’s easy to borrow your way to bankruptcy, where you can buy lottery tickets anytime you buy a loaf of bread, PLS is like a big neon billboard that turns a boring old savings account into an exaggeration of itself. Stick some money in here, it says, and you just might hit a big payday. And even if you don’t — well, your money still belongs to you. I’ll buy that for a dollar. Wouldn’t you?

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Freakonomics Radio is produced by W.N.Y.C. Studios and Dubner Productions. This episode was produced by Bourree Lam, whose lucky lottery number is 8. Our staff also includes Alison Hockenberry, Merritt Jacob, Greg Rosalsky, Stephanie Tam, Eliza Lambert, Emma Morgenstern, Harry Huggins, and Brian Gutierrez. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts. You should also check out our archive, at, where you can stream or download every episode we’ve ever made. You can also read the transcripts, and find links to the underlying research. You can find us on Twitter, Facebook, or via email at Thanks for listening.

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  • Dave Adams, Chief Executive Officer of the Michigan Credit Union League
  • Michael Barr, former Assistant Secretary for Financial Institutions at the Treasury Department
  • Leo DiBenigno, former Florida Lottery Secretary
  • Michael Gaudini, policy adviser with the city of Austin
  • Melissa Kearny, professor of economics at the University of Maryland
  • Robert Keip, former head of investment and premier banking at First National Bank in South Africa
  • Gordon Medenica, Director of the Maryland Lottery and Gaming Control Agency
  • Hugh Melamdowitz, Attorney of the High Court of South Africa
  • Billie June Smith, the first big winner of the Save to Win program
  • Peter Tufano, professor of finance at the University of Oxford