The bank as lottery idea gains momentum in Michigan

Anne Stuhldreher follows up on the results of Save to Win in the Washington Post.

More than 11,000 Michigan residents opened accounts through the contest, saving $8.6 million throughout 2009. People can open the accounts — they’re like certificates of deposit — with as little as $25. They need to keep their money in for at least a year and can make deposits as small as $1 as often as they like.

More than half of the participants said they hadn’t saved regularly before opening their accounts. About 60 percent admitted they played the lottery during the past six months. And 44 percent earned less than $40,000.

With banks acting like lotteries, maybe it’s time for lotteries to act like banks. For people who can’t give up the thrill of a scratch off game, state lotteries could sell a, say, $5 ticket where $4.50 would be sent to a bank account. Seven other Michigan credit unions have adopted the model. One manager explained that the lottery style bank account proved more successful than a short-term CD with a 10 percent interest rate!

“We were very surprised,” Hubbard said. “It’s a breathtaking penetration rate, especially for a new product and one focused on saving, since that’s something our members don’t do.”

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.

Lotto dreams for Armenian tax compliers

We’ve written about the potential for using social norms to decrease tax evasion. Armenia is turning to lotteries (whose attraction is explained by Prospect Theory). Given the relative weakness of the state in Armenia, compared to say, the U.S., an innovative use of lotteries might be a good option.

Armenia is offering thousands of dollars in lottery prizes to consumers who take receipts for their purchases to try to tackle rampant tax evasion in the former Soviet republic.

The initiative began on Jan. 1 and the first prizes will be awarded this month, after authorities said the threat of prosecution had failed to encourage shopowners and market sellers to install cash registers and provide receipts.

“It’s no secret that not many people give receipts in Armenia,” said Armen Alaverdyan, deputy head of the State Revenue Committee.

Hat tip: Brian Stoner

A good that is consumed more when budgets are tighter

When gasoline prices shot up this year, Peggy Seemann thought about saving the $10 she spends weekly on lottery tickets. But the prospect that the $10 could become $100 million or more was too appealing. So rather than stop buying Mega Millions tickets, Ms. Seemann, 50, who lives in suburban Chicago and works in advertising sales for a financial Web site, saved money instead by packing her lunch a few days a week, keeping alive her dreams of hitting a jackpot and retiring as a multimillionaire.

“With companies tightening and not giving cost-of-living increases, you have to try to make money elsewhere,” she said, though conceding, “It might be convoluted logic.”

From Sweet Dreams in Hard Times Add to Lottery Sales. Sigh…

Why don’t people cut back on lottery tickets? Proposition #1: People see the lottery as a means to equaling or surpassing the incomes of those around them. Read recent behavioral economics paper “Subjective Relative Income and Lottery Ticket Purchases” (here) for more on lottery ticket purchases, especially by the poor.

Low-income individuals may be particularly drawn to purchasing lottery tickets because lotteries afford them an equal opportunity of winning. They are likely to perceive the lottery as a rare opportunity to compete on equal footing with people who are more affluent.

Proposition #2: Lottery ticket sales don’t account for a large part of household budgets. A few bucks a week on Powerball tickets seems inconsequential. But people cut back on specialty coffee. Why not lotto tix? Specialty coffee and lottery tickets should be treated as goods consumed primarily by different social classes. So we’re back to Proposition #1. Continued lottery ticket purchases by people, especially low-income people, are not due to ignorance or cognitive errors. They are most likely due to factors underlying their economic status.

People with low incomes play the lottery, which amounts to effectively burning $.47 on every dollar spent, in part because the cognitions associated with poverty increase the appeal of playing. This creates a vicious cycle. The subjective feeling of poverty leads people to take actions that effectively exacerbate the financial condition which led to the actions in the first place. The cost is not insubstantial.

There have been policy proposals for encouraging savings by linking lottery tickets to bank accounts. Under these lottery-linked savings accounts, which are found most prevalently in Latin America, monthly drawings for cash and prizes are held for account-holding customers, who also get one lottery ticket for every $X they currently have on deposit.

A new bias? The “lucky store effect”

The Monkey Cage cites a paper by Jonathan Guryan of the Graduate School of Business, University of Chicago, and Melissa Kearney of the University of Maryland that tries to explain the following phenomenon:

In the week after a large-prize winning ticket has been purchased at a given store, that store experiences a 12 to 28% relative sales increase in lottery ticket sales. This increase fades over time, but the store’s lottery ticket sales remain elevated for up to 40 weeks. This effect increases with the size of the jackpot and with the economically disadvantaged proportion of the population.

What’s interesting about this finding is that previous research has shown that people decrease the amount of money bet on certain lottery numbers after those numbers come up winners. So they go to the store that sold the last lottery ticket, but don’t pick any of the numbers from the last jackpot? How can these apparently contradictory findings be resolved? Guryan and Kearney come up with an idea they call the “lucky store effect” in which “consumers erroneously increase their estimate of the probability a ticket bought from the winning store will itself be a winner.”

Continue reading the post here.