Think Like a Freak

by Steven D. Levitt

Unfortunately, the lottery is a dreadful investment. It typically pays out only 60 percent of the take, far less than any casino or racetrack would dare offer. So for every 100 lottery dollars you “invest,” you can expect to lose 40. But what if the fun part of playing the lottery could somehow be harnessed to help people save money? That is the idea behind a prize-linked savings (PLS) account. Here’s how it works. Rather than spend $100 on lottery tickets, you deposit $100 in a bank account. Let’s say the going interest rate is 1 percent. In a PLS account, you agree to surrender a small chunk of that interest, perhaps .25 percent, which then gets pooled with all the other small chunks from fellow PLS depositors. What happens to that pool of money? It is periodically paid out in a lump sum to some randomly chosen winner—just like the lottery! A PLS account won’t deliver multimillion-dollar jackpots, since the payout pool is drawn from interest rather than principal. But here’s the real benefit: even if you never win the PLS lottery, your original deposit (and the interest) remain in your bank account. That’s why some people call it a “no-lose lottery.” PLS programs have helped people all over the world save money while at the same time not blowing their hard-earned salary on the lottery. In Michigan, a group of credit unions recently put together a PLS pilot program called “Save to Win.” Its first big winner was an eighty-six-year-old woman named Billie June Smith. With a ...