Can cash prizes get people to save money?

Financial Inclusion

Can cash prizes get people to save money?

Like everyone else, potential savers are drawn to games of chance. Photo: <a href="http://www.flickr.com/photos/94272988@N00/14794343/">MarkyBon</a> via <a href="http://compfight.com">Compfight</a>
Like everyone else, potential savers are drawn to games of chance. Photo: MarkyBon via Compfight

Here's an interesting way to get people to save money: instead of paying interest, enter everyone who deposited money in the bank last month in a drawing for a big cash prize.

As described last week by New York Times columnist David Brooks, it's basically a way to pay interest with lottery tickets.

Go ahead and laugh. It works.

"For over three centuries and throughout the globe, people have enthusiastically bought savings products that incorporate lottery elements," wrote researchers of a 2010 paper that called for such a system to be used in the United States. Less formal and entreprenuership-focused than chit funds, these "prize-linked savings" programs are designed to boost the savings rate by tapping into humans' instinctual attraction to risk, excitement and big payoffs.

Two U.S. credit unions started using this system last summer. In South Africa, a private bank's program along these lines was so successful that in 2008, the government reversed an earlier decision and banned it because it was competing with the official state lottery.

Which is to say: there may be complications to implementing prize-linked savings systems, including the fact that the accounts deprive their users of interest payments. But as with the other behavioral economics tactics extolled by Brooks's column, policymakers and anti-poverty innovators should take them seriously. A new wave of science is proving that counterintuitive ideas like these can get real results.

RELATED: Chit funds: You save your money, you take your chances

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