The Psychology of Playing the Lottery


On this week’s podcast we discussed some stats from a recent Bloomberg piece about the lottery:

The lowest-income households in the U.S. on average spend $412 annually on lottery tickets, which is nearly four times the $105 a year spent by the highest-earning households, according to a study released on Wednesday by Bankrate.com. And almost 3 in 10 Americans in the lowest income bracket play the lottery once a week, compared with nearly 2 in 10 who earn more than that.

This is a survey of 1,000 people so take the data for what it’s worth but I’ve seen similar numbers in the past. This leads many to conclude lotteries are a tax on the poor. In the past, I may have agreed with this statement but when you’re at the lower end of the wealth spectrum you have the most to gain from winning.

On the show, I mentioned research has shown the mentality that causes so many people to play the lottery can actually be used for good to help them save more money. I reached out to Ashby Monk, a fellow institutional investor, who started a company that does just that. Monk sent me some research on the subject that I wanted to highlight because the takeaways are intriguing.

The reason poor people tend to place a higher value on a lottery ticket than rich people can be explained by the work of Kahneman and Tversky, everyone’s go-to for the study of human irrationality. Their work on prospect theory shows people place a high value on the prospect of a low probability event occurring, assuming the outcome would drastically change their lives. Thus, wealthy people wouldn’t experience the relative change as much as a poor person if they won the lottery.

In a piece he wrote for Institutional Investor, Monk discusses his company, Long Game, and why the key to saving just might be incorporating this gambler’s mindset:

Long Game is making a prize-linked saving account (PLSA) product, a lottery-linked personal saving account in which individuals receive chances to win big prizes for saving money. A PLSA combines the instant gratification of a lottery with the long-term benefit of a saving account, often by taking a small amount of the interest paid to everyone and using it instead to pay one big prize to a single saver. This offers a legal and legitimate means to change your life through luck with no chance of loss.

Here’s a short video that explains how it works:

In many ways, the entire crypto boom around the holidays was because trading that stuff felt like a video game. People would download the Coinbase app, buy some Bitcoin, check their account 15 times a day, buy some Etherum, watch the crazy volatility and get excited about their money for once.

That seems to be what Long Game is trying to do in a way — get people excited about saving by making it a game.

Northwestern researchers looked into the data behind prize-linked savings accounts in South Africa. They found the accounts were most popular with people who (1) had no formal savings accounts and (2) had borrowed lots of money in the past. So they actually got people who were more or less outside of the banking system or in debt to save. They also found participation in the national lottery system decreased when the PLSA program was running so it scratched that itch for many people.

Are these programs perfect?

Alas, nothing is. The Long Game website lists their interest at just 0.10%. This is about the same as you’ll earn on a savings account at a big branch bank but far less than you could earn in an online savings account (my online account with Goldman Sachs currently pays 1.9%).

But the interest paid on these accounts is beside the point. The point is to develop good savings habits for those who would otherwise wouldn’t save in the first place. This program seems to do just that.

Many people in the financial world spend their time pushing square pegs into a round hole by trying to change ingrained human nature. Typically, these efforts fall flat because they don’t take into account how difficult it is to change behavior.

I like ideas such as this that take into account the human element to help people improve their financial standing in the world.

Further Reading:
Lessons From the Couple Who Hacked the Lottery

Now here’s what I’ve been reading this week:

 

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