Balneus

Australian Lefty on Politics, Governance, Science and Info Management

Prize-linked Saving Accounts

Posted by Dave Bath on 2008-02-23


HBS’s First Look points to discussion of a lottery for savers, is thought provoking, and deserves more attention within Australia.

The idea is that prize-linked savings accounts, found in 20 countries around the world including Sweden, can boost national savings, and are attractive (and helpful) to low-and-middle income households.

Compared to customers not interested in the product and the overall sample, we observed that individuals interested in the product were more likely to:

  • Not have a regular savings plan
  • Have less than $2,000 in savings/investments;
  • Spend more than $150 month on lottery tickets
  • Be optimistic about their future income prospects.
Maynard (see below)

These results from surveys in the US (which only has a couple of pilot programs in credit unions) are in line with theory and international experience.  I’ll stress again, that those interested in putting money into prize-linked savings accounts include those who overspend on gambling.

The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers.  In some schemes, the major prize is significant.

Of course, many state governments are addicted to the cashflow from gambling taxes – even though the social costs, and government expenditure required to solve the problems caused, makes the actual revenues dubious.

Imagine the lobbying of governments by powerful banks (seeking more capital during a credit squeeze) allied social welfare lobby groups on one side, versus the gaming behemoths on the other.  That’s almost a fair fight!

Categorizing savings programs on a spectrum from coercive to exciting, Tufano and Schneider (2007) consider prize-linked savings a program that could make saving exciting, by leveraging the excitement generated by gambling and lotteries.  Categorizing savings programs on a spectrum from coercive to exciting, Tufano and Schneider (2007) consider prize-linked savings a program that could make saving exciting, by leveraging the excitement generated by gambling and lotteries

The HBS paper suggests that despite being totally in line with conventional theories of financial levers and behavioural change, and have potential for significant economic and social benefits, these constructs have not been the subject of many studies, but then, the poor are unlikely to fund this research, and the gambling conglomerates would fund economists to research anything else but the benefits of such accounts.

I wonder if prize-linked savings accounts might be introduced by Australian banks as means of being seen as socially responsible while getting more customers?

Because it is state governments who are likely to be in the pockets of the gambling industry (I cannot think of a state government that is free of such accusations), while the federal government looks after the finance industry, any moves would only be initiated by Rudd, Swan and Tanner.


See Also:

  • Tufano, P. and Schneider, D. (2007) "Using Financial Innovation to Support Savers: From Coercion to Excitement." Forthcoming in Access, Assets and Poverty, ed. Rebecca Blank and Michael Barr (Russell Sage).
  • "Prize-Based Savings: Product Innovation to Make Saving Fun"Maynard, N. (2007), Doorways to Dreams Fund Report.

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One Response to “Prize-linked Saving Accounts”

  1. […] call the banks, governments and financial commentators stupid for not talking about introducing Prize-linked savings accounts as a means to increase […]

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