Using a lottery as an incentive is becoming an increasingly popular strategy for choice architects. Harvard Business School finance professor Peter Tufano has come up with a saving program that tries to capitalize on the human tendency to overestimate tiny probabilities. The Wall Street Journal reports on the idea, which is 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. Only Michigan residents are eligible to participate.
This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. 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.
Hat tip: Christopher Daggett
Addendum: Liam Delaney at the Geary Behavioural Economics blog say this reminds him of Prize Bonds.