Impact

Summary

Behavioral Science studies [1,2] carried out in different parts of the world have shown that lotteries are effective in inducing savings behavior because individuals overestimate tiny probabilities i.e., they focus more on the prize on offer than on their probability of winning it. This has been shown to be especially true in the case of low-income individuals with limited means of earning a large payout in their lifetime.

Several real-world policy experiments based on this concept have also been successful such as the use of lotteries to ensure tax compliance in European countries [3] and Michigan’s “Save to Win” [4] contest. In [4], over 10,000 Michigan residents opened a one-year savings account after the Government introduced a lottery-linked savings account with monthly prizes up to $400 and an annual jackpot of $10,000. In 25 weeks, the program attracted about $3.1 million in new deposits of which more than half hadn’t saved regularly before opening their accounts. Use of prize-linked incentives is thus becoming extremely popular among choice architects.

References

  1. Emel Filiz-Ozbaya, Jonathan Guryan, Kyle Hyndman, Melissa Kearney and Erkut Y. Ozbayk. “Do Lottery Payments Induce Savings Behavior ? Evidence from the Lab.” Journal of Public Economics, Volume 126, June 2015.
  2. Felipe Dizon and Travis J. Lybbert. “Leveraging the Lottery for Financial Inclusion: Lotto-Linked Savings Accounts in Haiti.” Working Paper, August 2017.
  3. Joana Sousa Lourenço, Emanuele Ciriolo, Sara Rafael Almeida, and Xavier Troussard. “Behavioural insights applied to policy” European Report 2016. EUR 27726 EN; doi:10.2760/903938
  4. http://www.savetowin.org/