I’ve always hated the lottery. Then today I learned from this Freakonomics Radio podcast of a lottery idea I like:
Prize-Linked Savings (PLS). In a nutshell, PLS is a kind of savings account that pools some of the interest from all depositors and pays out a big lottery prize every month or so. It combines the thrill of the lottery with the safety of a savings account. It’s sometimes called a “no-lose lottery,” since a depositor is automatically entered into the lottery but can’t lose the original money she deposits.
Melissa Kearney, an economist at the University of Maryland who authored a paper on the topic with Harvard Business School professor Peter Tufano sums up the argument for it:
“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. 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 forty percent for folks making less than twenty-five thousand dollars 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.”
Finally, a way to harness the lottery for a good that doesn’t exploit people. Gambling made healthy! A reason to love the lottery. Then the kicker. It’s illegal nearly everywhere:
It turns out that the biggest obstacle to offering a lottery payout with a savings account is … the state-run lottery.
There is one exception. In Michigan there is a Save to Win program offered through several credit unions. Its first $100,000 prize went to an 87-year-old woman who had deposited $75.
The podcast is the first of two. A must listen!