This is brilliant. From the WSJ:
But psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called "Save to Win." Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly "savings raffle" for prizes up to $400, plus one annual drawing for a $100,000 jackpot. Only Michigan residents are eligible to participate.
This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.
Takisha Turner, 33 years old, is a dispatcher for the valet-parking department at Greektown Casino in Detroit. Ms. Turner doesn't gamble, but she has always struggled to save. She had only about $10 in her savings account at Communicating Arts Credit Union when she walked in a few weeks ago and heard about Save to Win.
"The teller said somebody else she told about it won," says Ms. Turner, "so I said, 'Well, you must be good luck then.' I thought it was a good idea, because earning interest means you win anyway. So I put down the minimum, $25." This past week, Ms. Turner won $400. She plowed the $400 back into her Save to Win account, getting a second shot at winning the $100,000 grand prize.
On some level, state and multi-state lotteries are already using a form of this theory to boost their available spending funds (here is how Oregon spends its lottery funds). So in so far as the lotteries substitute for tax revenue, it is extra money in people's pockets. However, like a sales tax, the current lottery scheme is regressive in so far as it tends to be those in the bottom of the socio-economic scale that spend a larger percentage of their income on lottery tickets. But the social services that they end up funding are more broad based.
The WSJ proposed scheme uses a lower return rate to fund the lottery winnings. Another scheme would be a general lottery funded by the lottery receipt itself, where the winnings are smaller than the existing lotteries (and thus more winners) and the winnings distributed as CDs or bonds that don't mature for a certain number of years).
Wow, I wish they did that in my state!! I would totally participate.
Posted by: teahouseblossom | July 20, 2009 at 11:54 PM