Using a lottery to boost saving

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.

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4 Responses to “Using a lottery to boost saving”

  1. pohanginapete Says:

    This is hardly a new idea. The New Zealand Government set up this sort of scheme (“Bonus Bonds”) in 1970 and it’s still going strong. However, it pays no interest; the returns to the investor accrue entirely through winnings. Apparently the expected return is about 3.4%, tax free.

  2. Jess Says:

    They didn’t claim it was a new idea. Just “increasingly popular.” Which suggests some degree of popularity before… and it’s a clever idea, but $25 is hardly what you could call an efficient savings…

  3. ty Says:

    why don’t they try to play real lottery ? they will probably win much more money

  4. Stan D Says:

    If you like to have a bet, buy don’t like losing money, then Prize Bonds is for you. It can be good fun cheking the results, if you don’t win this time there’s always next time. Your investment is safe and you can withdraw every penny anytime.

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