« Freakonomics Radio

12. Is America Ready for a "No-Lose Lottery"?

2010-11-17 | 🔗
For the most part, Americans don't like the simple, boring act of putting money in a savings account. We do, however, love to play the lottery. So what if you combined the two, creating a new kind of savings account with a lottery payout?
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the magnitude, if you were to have a sick or ailing relative on the other side of the country, had to buy full price plane tickets to could easily be that amount. And then why does language come up with as opposed to save, because what we wanted to see if people had access to resources between savings and credit and friends and family in about half of Americans are not able to come up thousand dollars in thirty days, which means that they stand only one emergency or crisis away from really quite dire circumstances. This isn't picked up in the national economic statistics. This is picked up at a much more local level at a much more intimate level and what happens inside families. It's this lack of savings, as it were, that motivates me to follow, is all about the motivation he's a professor at Harvard Business School. One of his specialities is consumer finance. He wants to
How many checks you write in for what? How much you borrow and why, in what you spend on beer on toys or a lottery tickets, couple singles just like my past? I never knew. Where are we.
From american public media and demi. When we see this is freakin onyx radio, today, America's sad savings rate may Matthew smack. If you like the lottery, we ve got a bank account for you. Here's your host, Stephen! That Americans are generally terrible. It saving money. Think about what Peter to follow just said: half our country doesn't have enough money in the bank to survive one breakdown, and it's not just people who don't earn a lot of money to follow, found that more than twenty percent of the households earning more than a hundred fifty thousand dollars a year couldn't come up with that two thousand dollars in thirty days. We are, however, excellent it spending money. How
cars, clothes, books, electronics and lottery tickets. Households that play the lottery spend on average about a thousand dollars a year on tickets, that more than a typical household spending, grocery stores on dairy products and beer combined this year, Americans, or by about sixty billion dollars worth of lottery tickets. The other day I went to historic pen station in New York called Carlton cards, pretty big in the back, their rack upon rank of greeting cards and some candy bins. but there weren't any customers back there. All the customers were jammed up front at the lottery counters. According to the New York State lottery, Carlton cards, I was more lottery tickets than any other store in New York. Korea priority is one of the managers. I asked him how much lottery revenue does his store taken in a year?
about eight to nine million dollar year holy. Eight to nine million dollars a year and lorries has a one store and penetration. Ok, you see people buying tickets. Although you see There is a lot Tommy how excited they are when they win when they re they forget about all those losses and they get exit. They look like therein, something's whatever they lose the greatest care, whether when they give you a hug me give me a kiss now heavily just hangs, Angie, probably some time problem, you're really probably don't want the hugger man area when I was in graduate school there is a local little store by my graduate school
housing unit, and I will stop there on the way home and pick up milk and orange juice and noticed lots of people buying lottery tickets. Mrs Melissa Corny, she teaches economics at the University of Maryland, and so I just sort of started chatting with the vendor and he sent a wife people coming in spending hundreds, thousands of dollars on lottery tickets a month a year and so being a graduate student scientists, download it's and data and started playing around and was struck. In particular, we produce bend a lot of money buying lottery tickets, so Just sort of a passing curiosity really, I started wondering about what were they not buying in order to buy lottery tickets? So so, let's walk through some of the numbers on lottery gambling. In the? U S, how many people play the lottery? Half of half of you as adult surveyed say they play the lottery at some point in the past year and Would that make it the most popular form of gambling, in the? U S and by fire soon to ETA. Three american adults report gambling and it's a fifty percent sale
play lottery. The next closest is casino which, as you know, about one in five adults. Why So many people play the lottery because it's fun for a dollar to you by the chance to dream big. This remarkable bargain illustrates a phenomenon but probabilistic oddity that economists call skinnes. That's the idea that there are some big prize way out there that correspond to a very small, but but there's some potential of capturing that an that's. What you're, typical money market account can't give write to. You could even have fifteen hundred hours in your money market accounts and every month you might earn. You know a dollar on it, but there is no chance, remind will you earn a hundred thousand hours or even ten thousand dollars? Now I know, as as an economist you're, not trained to answer this question, but, as a human being,
tell me why is skewed is so important to us that the chance and changing your life right. That's that's the return, your that's the big win outcome that might allow you to try to buy beach house organ of to send your kids to college in our. If it's less far out distribution. That may be what you need to do: make a down payment house or or by a car or throw your daughter, the wedding you wanna through our for a lot of people skinnes as an irresistible appeal, and so a handful of researchers like Melissa, corny or trying to harness its our the unlikely chance of changing your life with a big prize in order to solve America's low savings rate. The idea is a new financial products that combines the thrill of the lottery with the guy. All of say, accumulating more than two thousand dollars and savings account so that
Broken transmission doesn't become a full blown crisis. Here's carnies pitch, though we know Americans like gambling, they always have. majority of them. Do it and are going to keep doing it, and so we, we do is take seriously the idea that people want some small chance of winning a large sum of money that market 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 and in fact your reach national survey over a thousand adults. One in five american adopt said their greatest chance of accumulating. Hundreds of thousands of dollars was through the lottery that number jumped to forty percent for folks making less than twenty five thousand origin,
So a lot of Americans think the lottery is their only chance it winning big sums of money when we take that appetite for gambling for a product like this and and attaches to a savings vehicle that offers some positive return is a win win situation that win win situation and the chance to make it happen in the. U S has generated a lot of enthusiasm among economists like Carney and Peter to follow the Harvard Business School. Professor we heard from earlier. He the man who's been researching. What are called prized linked savings or p o s all over the world. I started in the UK because they have a practical premium bonds, which has been around for about fifty years a little bit more and where the government offers a savings product to investors, which at first glance, would look almost perverse. Give us your money and we promise you know interest, but that's not quite how the programme works, because its give us your money,
take your money out at any time and each month we're going to take basically the interest pool and we're going to lottery it off so that one lucky person will become a millionaire Literally every month, someone in Britain gets knock on the door from MR million or male millionaire, who tells them they have won the million pound price. There are, I believe, over a hundred thousand other people in the UK who find that they ve learned the smaller prices. This was an intriguing concept, and so the research that I've done tried to understand was this more like. Gambling or savings bottom line its both then I, this travel took me to South Africa, where I met Robert Type and he was creating protocol Mamma. The million a month account- and I think, in a word or in a phrase he described the entire economics and in substance the value proposition for savers. Quite simply everything the guy.
nothing to lose and savings account where you can take your money out when you like, you always have access to your principle and it will never go down and value. You may come out with a little bit of interest or you may come out with a little bit of a payment you make him the third a remarkably large payment, but you can only go up and you can never go down and then, in respect to the extensive work on behavioral economics and behavioral finance, the logic of this product is is quite obvious. People have what's called loss aversion. They much prefer to protect against losses than to worry by gains attend to Miss Estimate, small probabilities, but when you put it all together and very plain english people would rather have a small chance in life, changing
then an almost certainty of a pittance. So I can be guaranteed in this interesting environment, to put my money way and may be able to buy a coffee with the amount of interest that might come off. A hundred dollar account, whereas I am willing to say I'll, give up that interest, but there's some possibility remote as it might be, then I might be able to have a life changing pay out an amount that would allow me to buy a car or a house or even more so this preference for highly skewed pay officer. You know, or the kind of pay off that would normally present in gambling lottery products when combined with savings, turned out to be true Leslie Effective around the world, but it was completely absent for legal reasons. The United States, so what are those legal reasons as to follow discovered state law typically prohibit something like a prize linked savings account because it's a lottery and
according to state laws, the only legal lottery is a lottery? That's run by the state itself, nice monopoly? If you can get it right now, you can hardly blame states for keeping lottery to themselves. They generate billions in revenues So while most states might like to help their citizens save more money, they might not be willing to, their own lotteries against ones. That might be run by say, a bank Fr economics radios brought to you by square if you run business. You know how important it is to have a healthy cashflow. That's why we take payments with square either in person or online. You get your money fast. Does it instantly vs where card a free business, debit card or a tree,
for it to your bank. Account on. You reschedule see off all the ways square can help at square dot. Com slash, go slash, freak, oh nonsense. Thanks to Pennsylvania, lottery, scratch ass, pennsylvanians or scratching their way to fine, and we new games every month, big top rises and second chance, drawings, excitements, always in order so Try Pennsylvania, lottery, scratch offer your ticket to fund and get yours today. Keep on scratching must be eighteen or older. Please play responsibly benefits older pennsylvanians every day economics. Radio sponsored by wonder is business movers podcast when Coca COLA change their recipe to what they called new Coke in nineteen eighty five. The backlash was swift and severe and the man who drove the change German Robert boys wetter pulled nuclear from the shelves in a matter of months wondering
business. Movers explores boys what is controversial decision and the public response, but the real story. New coke is far. more human and complex listen to wonder? Is business movers podcast on Apple, podcast, Amazon, music or ad free in the wondering at Peter to follows research the prize linked savings programmes around the world, convinced him that the idea could help Americans partition A low income Americans increase their frightened low savings rate- the lottery aspect made it illegal in most states, but in Michigan there was a loophole last year to follow, got a group of credit unions to pilot the idea. Here's Dave Atoms, CEO of Michigan, Credit Union League and banking, can actually be pretty boring. It's not like. We go to our social events and talk about how much were saving and talk about the great new feature
new checking account its banking services are pretty mundane, so what people want and need is a fun way to save and in Michigan we ve come up with what we think will accomplish that it, Sir it's program called save to win and what it is it so using a lottery concept so that for every twenty five dollars they put into one of these one year, certificates of deposit, they are going to get a chance at cash prizes and the cash prices are given out every month by participating credit unions ranging from fifty dollars to five hundred dollars and and then there's a grand prize at the end of the year. An opportunity to win a hundred thousand dollar Grand Prize so save to win, gives people what they need witches. They need to save more while giving them what they want, which is a fun way to do it of a game of chance. That makes it interesting to save something that you will want to talk about at a party
hey. I want our grand yeah so you're making savings sexy by introducing a lottery element. I think so I think I don't know if it's, if so far as to say that it sexy, but it certainly is far better than talking about the point. Five percent that I'm getting on Might Maya, safe and sound
out of the bag. So now you're getting you're getting a competitive interest rate you're doing what you know you need to do, which is to be more responsible in the way that you save and plan for the future. But you you're getting a chance. Somebody's cash prizes, including a chance at a hundred thousand dollar cash prize and the odds, are winning, are much better than what you would would see if you were buying lottery tickets, even with sputtering economy and low interest rates. A handful of credit unions in Michigan, open fifteen thousand new savings accounts, save to win surveyed some of these customers. More than sixty percent of them had spent money on the lottery or gambling. In the previous six months, fifty five percent had had no savings. Plan. Save to win was beating its.
on reaching the customers it was supposed to reach. It makes you wonder what would happen if a programme like this took over an entire country clothes, my name from Cape, I worked at First national bank. For eleven years, where I headed up the investment product task, which was a business unit that really focused on retail deposits both can man. Corporate deposits and focus was trying to look at ways of growing the base of the bank First National Bank or Fn B, is in South Africa in two thousand five. It started what would turn out to be a phenomenally successful priceless
savings programme, it was born out of South Africa's financial problems, as the country struggled to put the apartheid air behind it. Millions and millions of Black South Africans did not use banks for anything robber, Cape wanted to find a way to get some of them in the door now in South Africa, because so much of the population. Is on banked summit of the savings. ass. It literally sitting on the mattresses. Now this got a big, a double effect to the one that does really do badly at it. Moves that that funding from the mainstream banking environment so comprehend two to leaned out and end fund economic growth because Rita we intend to come in from consumers and then get leaned out to businesses. I, who can and create jobs in the sector
One problem is that the second problem was really that these people, with the money and a deep, a bank accounts, were excluded from the banking system. and by being excluded from the banking system, you miss in semi benefits which really help with people's individual development. For example, developing credit records peanut to be, exposed to having your money, stolen or lost on the way home, but CAPES Bank had a problem interest rates at the time, weren't, keeping inflation. So putting your money and a plain old savings account my actually erode its value. Capes job was to make it worthwhile for customers to deposit new money, so instead of simply offering an account with a scrawny interest rate, he'd offer an account with practically No interest rate at all, but it came with the chance for a really big payday. So what we did
literally pooled all of these little point to five percent of interests and in what would that be? without that interest in lump sums Few people, so we we paid out a hundred fifty people a month in love some prizes. So the first A price would be a million round which is a normal spent billions in South Africa and in the three prices up ahead tell them round, and then we went down to twenty thousand round. In a few prices of of a thousand grand, so really what we d be just connect, the little bits of interested would be paid on these. These occur all these little counts and impeded out randomly to a few Like you and us? So, let's say I live in South Africa. Take the money, I'm learning and put it under my mattress, or maybe by some high risk, equities, you're, offering me the security of a bank account and the excitement of a chain to win a million ran right now. What do you call this idea? because the million a month account Mamma and
became the trivial name for it. And you're the man who gave birth to Mama this, how successful was Mama shoot he probably to successful efforts for its own good Mama attracted more than a million new customers to capes bank other banks in South Africa took no and they complain to regulators, and then capes bank heard from someone else, the south African national lottery. Won't we engage with them before we launch three wrote them and asked the move, their opinion on the product, the Rex, the box in that they didn't think it was a lottery they thought of folly. to a promotional competition possible legislation? And that is that we must comply with the requirements of the promotional common competition. And belonged standing. Nothing was heard from him for six months
and then they contact us to say. Actually they don't like what you're doing and they think that it's a lottery now so when, we're starting out, and there was very little money in your coffers. They but it wasn't a lottery, but then after it got going for why? and you had how much a couple hundred million dollars two hundred million dollars abided by the tummy. We close down and but more importantly, it was Emily customers that we had brought in, and National lotteries Board changed its mind than it thought. Oh, that thing that we say a little while ago is not a lottery. Now looks a lot like a lottery this and what did they do then? although it refers, engage with them and to try to discuss it, but it was very clear that were in no position or not you didn't even try to discuss what dishes were, and They took us to court to have us close down
Hugh MILAN do its is the man who took Mamma to court he's a lawyer represented the south african National lottery MILAN to its argued that first national banks, Mama Programme, infringed upon the state lotteries right to be the only game in town the case when all away South Africa's Supreme Court of Appeals and MILAN to its one. Every time here, we must be very good I can answer that when Mama was created about seventy percent of low income. South Africans were said to be unbalance. The government was eager to cut this number Mama made it easy to get people in the bank. All they have to do as deposit a minimum of a hundred rand or about fifteen dollars into a thirty two day call a counter what we call a certificate of deposit. So, what's wrong, with? That will need a space. It isn't inducement to were to bank but sir, for the period in which share
in which your money is deposited in the bank. You do not receive any interest and scientific as a relatively high interest rates heap the part of the motivation around the account was reset taught. It is being no cost accounts. But sir, which was correct, but also there was no interest earned in. Does South Africa on a city today call a cab your interest rates is failing spiritual, so the days when your money wasn't, will you idiot earning an interest? Whilst it was sir, whilst it was sitting in the bank accounts under the bank earning substantial sums I think the year The idea was that it was driven towards the on banks and hence the minimum amount of a hundred grand so realistically, substantial amounts have been deposited into the inter counts, with the chance of verse of effect
king, the the million rand return. Now, how successful was the savings plan run by fn be in actually drawing in money from either the previously thanked or citizens at large. How much money did they taken in? What period of time will substantial money taken and not necessarily from the and bent. My understanding is that substantial funds came from the irregular, regular customers and really The customers you had sufficient means at their head deed and essentially free money sitting around that could afford to put aside for Russia and for the fifty two days without affecting any return. When you real real return, some honest is that the funds were deposited not predominantly by the unvanquished, really predominantly by by the banks and envy. Why would you predominantly body more wealthy yeah, a customers, the return it
Bank made was sir, was fairly substantial. Milan do it's. His argument seems a bit at odds with itself. He says the bank took advantage of people by failing to give them a high interest rate, but also the most people who bought into Mama weren't the unmasked that they were wealthier customers who had, as he puts it, free money sitting around if they want to play the bank's lottery without money instead of the national lottery. Why should, may be free to choose. But MILAN do it was doing his job, protecting the interests of his client, the national lottery and it worked. Mama was shut down Robert Cape, the man who created Mama First National Bank stand, by its success. He says the excitement of the lottery pale got people in the door so fast that the cost of acquiring a new bank customer fell from three hundred dollars to five dollars, but that was Mama's goal in the first place to expand banking capes, as twenty percent of Mamma accounts were opened by p.
Who were previously unbalanced, sure it wasn't the majority but Mamma reach that level in just the first three years, and took in more than two hundred million dollars in deposits last year. after Mama was shut down by the national lottery. Robert Cape was. I did to Washington DC to talk to federal banking officials about the programme. Success almanacs, Creek Economics, radio. We take the idea of the prize link savings to the lottery officials of Amerika, don't like so much from from a purely lottery perspective. I think the floor The lotteries. The only entity in Florida second operate a lottery game, so I'm gonna say probably sounds illegal under current Florida law, and one of the first no lose lottery. Winners in America describes how winning an saving feels a little bigger with them. That is next
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Transcript generated on 2021-03-19.