Sunday, December 13, 2009

Save to Win - incentivizing savings through lottery!

After "Save More Tomorrow" and "Give More Tomorrow", here comes "Save to Win". It seeks to structure the "choice architecture" in such a way as to encourage people to save more by drawing on insights from behavioral economics that people tend to over-estimate the odds of rare events.

Peter Tufano of HBS has devised "Save to Win" as a cross between a Certificate of Deposit (CD) and a lottery ticket, and it was launched for members of eight credit unions in Michigan. Under the Michigan scheme, members of the credit union who put $25 or more into a Save to Win one-year CD (which pays a rate slightly lower than rates offered by conventional CDs) are entered into a monthly "savings raffle" for prizes up to $400, plus one annual drawing for a $100,000 jackpot. In other words, they get both interest return from the CD and the (over-estimated!) prospect of hitting the jackpot.

Another example of such savings-cum-lottery instruments are the Irish Prize Bonds, offered in units of €6.25 with a minimum purchase of 4 units, which are a unique form of tax and risk-free, state guaranteed investment offering you the chance to win big cash prizes in a weekly lottery.

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