Crafty Nudges and Prize Linked Savings Accounts

Thirteen percent of US citizens play the lottery every week. The average household spends around $540 annually on lotteries and poor households spend considerably more than the average. The high demand for lotteries, especially among the poor, has led many to suggest that we use them to promote some other good. Los Angeles, for example, has recently discussed giving voters lottery tickets–a great idea if we want to encourage more voting by uninformed people with a penchant for get-rich-quick schemes. What could go wrong?

A somewhat better idea is to use lotteries to promote saving. Prize linked savings (PLS) accounts offer savers pro-rata lottery tickets based on how much they save. The average return on a PLS account can be the same as on regular account but the interest rate is lowered to make up for the small probability of a big gain. It’s illegal for banks in the United States to offer lotteries but a few credit unions have experimented with PLS accounts and they are used in some 20 other countries around the world.

Does the option of saving in a PLS account increase total savings or does it merely reallocate savings? In a new paper, Atalay, Bakhtiar, Cheung and Slomin run an experiment in which participants allocate a budget to consumption, saving, lottery tickets, and a PLS account. They conclude:

…the introduction of a PLS account indeed increases total savings quite dramatically (on average by 12 percentage points), and that the demand for the PLS account comes from reductions in lottery expenditures and current consumption. We further show that these results are stronger among study participants with the lowest reported savings on the survey.

Thus, PLS accounts appear to be a kind of crafty nudge, a way to trick the get-rich-quick brain module to save more.

If we allow PLS accounts, the poor may save more and in a competitive bank market the return on PLS accounts will trump the lousy returns offered by state lotteries. Win, win. If we deregulate all kinds of lotteries, however, I have little doubt that entrepreneurs will come up with schemes that will easily trump PLS accounts–but without the social benefit of encouraging saving among the poor. As a libertarian, I can live with that but as a political economist I wonder how well we can draw the line between banning gambling and allowing gambling so long as it’s tied to a nice nudge.

Comments

Another example of libertarians wanting to destroy the schools.

The "schools"?

Where I come from the lottery is just used to increase tuition at the signalling universities.

You need a good name for the device. The British one is "Premium Bonds", which sounds a bit dated now but was good enough in its time (mid-50s). It became the fashion when a friend had a baby to buy the mite a Premium Bond. The minimum purchase now is 100. Inflation, eh?

And the 1.3% rate. Admittedly they're also tax free, government back and redeemable on a weeks notice.

The way to do it would be to have the option for depositing in a savings account to come entirely in the form of lotto tickets, but with the tickets having a slightly over 100% expected value (rather than the ~50% EV of standard state lotteries at present).

So I go to whoever offers this and put in $100. I get $100 in scratch offs. Any winners that I cash in have the winnings immediately deposited in my account, with the amount put on hold for, say, 2 weeks (this is necessary to prevent it being posssible to game the system to produce ubsustainably high returns).

Anyone who actually cares about improving the lives of the poor should be looking to replace current lotteries with something of this sort.

And all sizable prizes are distributed over time, directly into the account.

"... how well we can draw the line between banning gambling and allowing gambling so long as it’s tied to a nice nudge"

Except we don't ban gambling, anywhere. We just usually let the government have a monopoly on it.

Yep, and it responds by preying on the most vulnerable segments of society with tons of commercials for games with abysmal odds. At least in NY, maybe there are fewer commercials elsewhere.

That's what gets me. I guess I understand the rationale for the lottery. Mobs have always run numbers rackets- why shouldn't the state get in this business and channel the money to more socially desirable ends?

But gambling is extremely dangerous for at least a segment of the population. I don't understand advertising the lottery. At all.

It's almost as if the government looks at its most vulnerable citizens as profit centers! But it's for the children!

But what a dumb place to look for profit centers!

@Willie Sutton

It's dumb only if you really think that the best interests of citizens is the government's highest priority in reality, rather than just in speech.

But but but...show me the money! I don't see it.

But but but..the money isn't here! It's in Joan's house, and Mrs. Mecklund's.

In Washington they have commercials urging people to give lottery tickets as gifts. To get new people hooked.

NY has (maybe still has) a birthday-themed scratch off to give as a gift. And there are holiday-themed ones every year.

Cruising on the Riviera one day,
The lying in a Bombay alley next day...

The factoid took me by surprise. The average household spends $540 on lotteries?!

Does anyone know how much the median household spends?

Half the annual cost of Obamacare for a family member ;)

Only $10 a week. NY has $30 scratch off games. My brother worked at a gas station for years and told of people coming in on pay day and investing half their paycheck.

It really is targeted at, and consumed by, people on the lower end of the income scale. And by me, despite knowing the terrible payouts, mostly because I saw my parents play growing up.

When I worked with blue collar guys it was completely normal to spend $20 a week on lottery tickets. They talked about this openly, and often - their favorite numbers, strategies, the best games, etc., were some of the most common conversation topics. It was incredibly boring to listen to.

I remember very clearly one guy who would regularly get worked up about the huge amount of taxes that would come out of his jackpot, when he hit it. He was also making minimum payments on a used Thunderbird at, probably, 15% interest.

Are American lotteries used much to money launder? Or is it too inefficient?

It could be used, but the expected return requires you to take a big haircut. It is also, probably, time consuming.

I'd suspect that it would be way too inefficient. There are just easier ways to launder money.

I said easier, but I meant safer ways. Lottery ticket winnings are paid by the government. I would guess that most people who are trying to launder money don't want large checks from the government mailed to them that they had to provide SSN's and ID to get.

Or, we could de-cartelize the banking industry so they'd have to compete for depositors' dollars.

I suspect that not all the new entrants would be competing in the ability to give the depositors money back upon request...

Don't you find it striking that an economist composed this post and didn't mention interest rates?

It's amazing the areas where libertarians think the market should have a free hand, and where they think we need regulation via central committee.

This was discussed in last week's Slate Money, which Tyler linked to several months ago.

http://www.slate.com/articles/podcasts/slate_money/2014/09/slate_money_on_wall_street_jobs_dollar_stores_and_premium_bonds.html

Another potential advantage: It might make it more profitable to run banks or bank-like institutions in poorer neighborhoods. Among their many other burdens, the working poor tend to face crazy high transactions costs.

First, I agree that lotteries play upon the poor's self control issues, as well as a gain looking much larger than a loss when playing a lottery. However, if lotteries are going to exist, and be promoted, then the question is whether using a lottery as a savings vehicle is appropriate. It probably is, because a poor person, hammered by daily other problems, is unlikely in this domain to have the self control to save otherwise.

Second, you could also approach this as a transactions cost problem and a distribution problem. Lottery outlets may be more numerous than banks in poor neighborhoods, and the lottery transaction is also a savings transaction, with savings transaction costs shifted to the lottery transaction, or at least the transaction costs (time and money) are split between both the lottery and savings transactions.

Third, lotteries typically fund prosocial activities...education, wildlife stuff, etc., but this one, at least partly, does not. So, the question is: does self-interest with the proceeds (it goes to my account) trump prosocial in terms of motivation to gamble, and secondly, if all prosocial contributions were eliminated so that this became solely a savings plan, what role should the state have in sponsoring or permitting it.

My impression most policy wonks will tell you that the "lottery funds schools" line is at best misleading, at worse a scam to promote lotteries. The funds from the lottery go into the generic state fund. If the lottery suddenly makes the state twice as much money, the schools aren't getting any extra funding. If lotteries went away tomorrow states would probably have to raise taxes elsewhere, but schools aren't getting defunded. I could be wrong.

I think this is right, my completely uninformed guess is that meaningfully increasing poor folks' saving rates would be significantly more "prosocial" than whatever charitable-ish veneer they currently plaster onto the lottery.

Wait, im confused, isnt saving bad according to Keynesian economics? If we encourage more saving wont that destroy the economy and cause the country to be overrun with dinosaur riding Nazis allowing the terrorists to win?

No, savings is not categorically bad according to Keynesian economics. It's sometimes good, and other times bad (i.e., when in excess during high unemployment).

I am somewhat confused how this makes the problem much better. The poor are still paying for lottery tickets, just through their savings account, and with a bank getting any VIG rather than the government getting it. I'm in favor of encouraging savings, but this might actually increase the amount spent on lottery tickets because it would rope in a bunch of savings accounts from the 87% of people who don't buy tickets weekly.

By making the price an amount of savings rather than a token ticket price, there is a massive reduction in the number of "tickets" purchased. A hundred dollars buys 1 ticket (in interest) and 100 dolllars of savings rather than 100 tickets. So the expected losses drop from $50 (that may be "reinvested") to $0.50.

This seems like a reasonable way to deal with it. I always assumed that there is a fixed value associated with "I might win!" that rises extremely sublinearly as probability of winning goes up. That said, a lot of people buy 10 lottery tickets.

The idea would be to greatly decrease or even elimjnate the VIG. At present it is 50% or more on lotteries: every $100 a poor person spends, they can expect to get back only $50..

And even that is an overestimate, as the possibility of a big win is a large part of even that shitty return, but a big win will be taxed.

Maybe we could find a generalized social solution in which we set up a system of nudges that harnesses people's natural impulses and urges and channels them into pro-social and personally-beneficial productive activity?

Probably some reactionary, bigoted scheme to keep wages high and land cheap. I'm calling Homeland Security.

My local council (UK) area apparently buys a huge number of lottery tickets. The lottery social fund likes to "give" back to the community which buy tickets. Cue the well off area I live in getting told that lots of lottery money is available and it being spent on a movie about the long defunct oyster industry.

Simply because it's in the news, I note that Rotherham has 63 councilors for a population of 250,000, and they're paid a basic allowance of approximately $20K in addition to expenses and special allowances.

Repeat for all of UK, and you have way too much government, and the government has too much money if they're gambling with it. Literally, gambling with it.

The council isn't buying the lottery tickets, the residents are buying the tickets. Rotherham is an Urban District Council, as the Urban County Councils were abolished in 1986 it is in an area with single tier local government. It is the only level of government below Westminster other than the South Yorkshire Police Commissioner, this hardly seems like an excessive quantity.

"Los Angeles, for example, has recently discussed giving voters lottery tickets–a great idea if we want to encourage more voting by uninformed people with a penchant for get-rich-quick schemes. What could go wrong? "

I agree. What could go wrong?

My friends and I are well informed, well more informed than the average citizen. Yet, we will almost always vote differently. I doubt that any of us are really well informed at all, even though we like to think so. In fact, I suspect that there are very few really well informed voters at all. The politicians don't really want well informed voters. Many times it seems that even the politicians don't want to be well informed.

So what could go wrong? More ill informed voters? So what. What's so different than the way it is now?

Perhaps you'll get a better turnout from a demographic that is usually hugely ignored by everyone. Perhaps some of those going to the polls might actually take an interest in the esoteric processes of American politics that always seems to screw them.

So what could go wrong? Maybe new voices will be heard from and the currently comfortable and haughty might be displaced. Now that would be tragic.

Or, maybe people with such poor math skills and high time-preference will vote themselves other people's money until all the net producers move away. What could go wrong indeed.

Ah...

I think I am hearing the voice of the comfortable and haughty, who think they are particularly well informed and whose judgement should never be questioned!

Please forgive me.

If "those" people, with bad math skills (and why is that one might ask), who now buy lottery tickets got some political power, maybe all those laws that provide welfare for the rich would be repealed and then those privileged sons would have to compete on their merits.

They, those privileged sons, would be like the white soccer players from the fifties, when blacks couldn't play in the exclusive clubs. And we all know what happened after the affirmative action plan for white soccer players was repealed.

If you're reading this, you have surplus time and resources.

"people, with bad math skills (and why is that one might ask)": probably because they are a bit dim?

Ixm, you go to the local convenience store and just try to teach them good math skills. Tell us how many people you've converted to the lottery is for suckers camp, then follow up in a year and see how many you still have converted. My guess, you're an idiot.

You are missing the point, and literally inventing fantasies about what such Lottery people will do when they vote.
The problem isn't that more poor will vote. It's that the lottery tickets will encourage those will poor impulse control and low numeracy to vote: rich, poor, and in between.
Maybe you think more people like that should vote, but they certainly won't vote your Fabian Socialist preferences.

There was an implicit assumption in Alex's original post that "those" people who buy lottery tickets should not be encouraged to vote because others know better. ("What could go wrong?") Voting is the quintessential American practice and Alex suggests that it is best that some folks not vote at all.

This whole string of comments demonstrates the same bias. In much less nuanced terms.

You've proved my case for me.

Good Work!

I commend you all!

You are such well biased voters that I must say I am not glad that you can get to the polls!

Alex made the case against seeking out more votes from lottery players. Your invented narrative about "those people" (poor, black, whatever victim class your white guilt is peaking on today) is just that, invented. Furthermore, in case you weren't aware, we aren't talking about removing the franchise from people, we are talking about whether we should encourage people to vote with a product for which demand represents undesirable qualities. Somehow I don't imagine that you would be so dismissive of concerns over the type of people a free copy of Glen Beck's book with your ballot would encourage.

Come on. I think whatever your political leanings or social class, you have to admit that American democracy would work a lot better if certain people abstained from voting: principally, people who are profoundly mistaken or ignorant regarding basic matters of law, commerce, government, public services, etc. The question is simply whether the kinds of people who think lottery tickets are worth the time and effort necessary to obtain them will fall into this category. The answer is likely yes, naturally, because if you don't know enough to realize that you'd be better off stuffing that $10 per week you're spending on lottery tickets under a mattress somewhere, then there's probably a lot of other basic stuff you don't know.Whether the act of casting a vote is "quintessentially American" or quintessentially Zoroastrian for that matter is irrelevant.

No. I disagree.

The more people who participate the better off everyone is.The presumption that some folks should not participate for one vague reason or another is at best, patronizing, at worst, un-American.

Do you remember: of the people, for the people, by the people?

So if giving lottery tickets or Glen Beck books to voters leads to more voters, that's great. And, I will add, it's really presumptuous for anyone to claim they are an informed voter when it's next to impossible to get informed. You vote your ignorance and your prejudice just like everybody else.

And maybe if enough of the disenfranchised do decide to vote we may be able to begin to unravel the welfare state for the rich that appears to be the top priority for our government today.

"The more people who participate the better off everyone is."

This is an unsubstantiated assertion. You have offered no reason for me to think it is correct. Quoting a sentence fragment from the Gettysburg Address doesn't count.

I would add that not everbody's ignorance is equal. Hence why children aren't allowed to vote.

Jeff,

The aristocracy also thought they knew best. And they did. But they only knew or cared about what was best for them.

Sounds like you. Another member of the comfortable and haughty, willing to dismiss millions of others to advance their own goals.

And I know that there is no convincing you of the truth of this.

Some countries have mandatory voting, with 90% turnout. How are the "comfortable and haughty" doing there?

Isn't the point of a lottery is to drive illegal gambling (numbers etc) out of business?

There is only one point of the lottery: to tax the poor and trick them into thinking it's entertaining.

Much like the cigarette tax.

Uninformed voters" like those who think Obama was born in Kenya? They all vote, anyway.

"A way of shifting a state revenue stream to private banks" sign me up said no state government ever.

Poor people play Lotto, rich people play options, betting is betting.

And both can be done with OPM.

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