And, how could it lead us to more savings?
Why Do We Play the Lotteries?
by Teddy Worcester
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Millions of Americans lined up to spend $1.5B on lottery tickets last month to have a chance at winning $656 million, the biggest jackpot in history. I use the word "chance" loosely here because the odds at winning a jackpot, 1 in 176 million, are long odds to say the least. Any rational person with basic math skills should be able to look at these odds and realize that it is not a sound investment. So why did millions of people flock to their local convenience store and spend a dollar or more on this wild chance?
Research conducted by Cambridge University's Behavioural and Clinical Neuroscience Institute show that gamblers overestimate their chances of winning, as most games promote "an illusion of control." Now, it is fair to say that the vast majority of Americans buying lottery tickets do not have a gambling problem. However, the same psychological triggers at play are the ones that drive these seemingly irrational behaviors. Cambridge researcher, Dr. Luke Clark, led a study to pinpoint the areas in the brain that promote this behavior. His research led him to an area of the brain called the striatum, which he states is "a crucial component in a reward circuit that also responds to natural reinforcers like food and sexual stimuli, as well as drugs of abuse like cocaine." That's right - it is human nature to cling to these unrealistic odds, and the brain is stimulated in the same way as, say, consuming food or having sex.
On average, Americans with an income under $13,000 spend 9 percent of their income on lotteries, according to a 2009 study by the Commission on Thrift. For the entire US population, each person, on average, spends $199 a year on lottery tickets. This average is much higher in some states, such as Massachusetts, where each individual, on average, spends $806.75. It would be no surprise if the 2012 figures were even higher, given that the largest jackpot in history took place this year. It is slightly disconcerting that this many Americans are spending a considerable amount each year to play against such meager odds. What if there was a way to emulate the lottery experience while promoting saving at the same time?
SaveUp, a free program that rewards Americans for saving and paying down debt, is doing exactly that. SaveUp is working to implement the same game mechanics that are part of the lottery experience into every day personal finances. On SaveUp, users can link an account from over 19,000 US banks and credit unions and earn credits for their good financial actions. Since the November launch, SaveUp users have deposited over $60 million into savings accounts and paid down over $35 million in debt. SaveUp co-founders, Priya Haji and Sammy Shreibati, were inspired by an international financial instrument called prize-linked savings, a type of financial account offered in more than 20 countries.
Prize-linked savings is not a new product. In fact, throughout Europe, banks have been selling a special bond called a lottery bond. Lottery bonds are government bonds that typically yield no interest but offer the chance at winning a pooled jackpot. In the United Kingdom, for example, lottery bonds are called Premium Bonds, and they are wildly popular. Bond holders with over £1,000 in bonds have a 28.3% chance of taking home winnings, while bond holders with over £10,000 in bonds have a 96.4% chance of winning something. Generally, each month, there is one £1 million winner, about five (5) or so £100,000 winners, ten (10) £50,000 winners, and so on. The best part? It doesn't cost anything to buy these bonds. In fact, the prize payouts convert to a 1.5% interest rate on average. Since these accounts don't actually pay any interest, the aforementioned 1.5% rate is calculated based on the average winnings per person.
While these accounts are popular in over 20 countries, laws in the United States prevent banks to partake in any such program. A 2008 Harvard Business School study by Peter Tufano found that Americans want an account like this and could benefit from it. He co-founded an organization called the Doorways to Dream Fund (D2D), which helped pass legislation, in a joint effort with the Michigan Credit Union League and the Filene Research Institute to allow several credit unions to launch similar accounts. While only five states were able to pilot these programs, the results have proven to be quite positive. They have successfully served the low-income and underbanked population in these states and promoted positive financial behaviors, shifting spending away from lottery tickets and into savings accounts. Passing state legislation has been the most difficult part of the D2D Fund's initiative, limiting them to credit unions in only a few states. However, it's only the beginning and the prospects for prize-linked savings are exciting.
Both international lottery bonds and the D2D Funds successful efforts have inspired the SaveUp concept through the idea that skewed rewards can motivate positive financial behavior. While SaveUp is not a prize-linked savings program like the D2D launched with credit unions, nor does it deal with Lottery Bonds, they wanted to create a free experience where Americans could get rewarded for every good financial transaction at any U.S. financial institution that they banked at.
Just think of this. If Americans had put $1.5B into their savings accounts rather than toward the Mega Millions Jackpot, collectively they would have earned $15M in interest each month, not to mention the potential to win prizes through SaveUp. That is a much better, more sustainable way to feel good, all while earning monetary returns.
Teddy Worcester is part of the team at SaveUp, the first free nationwide rewards program that encourages Americans to save money and pay down debt.
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