Can lottery linked savings give people the thrill of winning with the benefits of saving?

An article posted in December titled Who Could Say No to a ‘No-Lose’ Lottery? by the Freakonomics team is triggering debate about the merits of Prize or Lottery Linked Savings schemes.  The concept of lottery and prize linked schemes is not new in many countries, especially the UK which has been running them for decades.  The UK’s prize linked saving scheme, called the Premium Bond scheme, was launched in 1964, and was described by the then Prime Minister Harold McMillan as ‘savings with a thrill’.  People 'invest' (and kind of gamble) up to £30,000 in bonds, with more bonds increasing the chances of winning the prizes, ranging from £50 - £1m.  The price or cost to the investor for having the chance of winning a prize is a guaranteed return on your principal or investment at below market interest rates.

So why the recent interest in these schemes and lotteries?  Peter Orszag, former director of the US Office of Management and Budget under Barack Obama, has argued in a recent article in the Financial Times that lottery linked saving schemes could be an innovative means by which to encourage people to save in the post-recession era.  Professor Peter Tufano of Harvard University, an expert in mutual fund and lottery linked savings schemes, agrees with Orszag.  And people love lotteries!  Seth Godin’s recent blog explains this succinctly; in terms of practical mathematics the chances of winning a lottery are very slim, which means people play the game for a thrill. 

In his paper Saving whilst Gambling: An Empirical Analysis of U.K. Premium Bonds, Tufano explains that lottery linked saving schemes are fascinating because of their appeal to non-savers, especially low income families, many of whom play the lottery.  He argues there is evidence to suggest that in Latin America these schemes have gone a long way in helping the unbanked population to save, arguing they wouldn’t have saved if such schemes hadn’t existed.  There is also a psychological appeal, in that because the principal payment (i.e. investment) is riskless, it appeals to people’s loss averse nature to gambling and investments (see our earlier post Can Loss Chasing be Explained by Behavioural Economic Theory? to read more about the behavioural factors that drive our financial decision making processes).  Tufano has been putting his theory into practice with eight credit unions in Michigan with the launch of a product which turn savings accounts into a game called ‘Save to Win’.  By the end of 2010 there had been $28m in savings racked-up and two winners.  Alabama has recently lauched a Save Now Win Later product.

So what is driving people to these schemes and are they encouraging greater gambling behaviour?  Tufano says there is evidence to suggest that UK Premium Bond demand mixes both gambling and saving incentives, with sales correlated to the size of the largest prize, similar to a lottery.  However the UK's recent Gambling Prevalence Survey doesn't include such schemes in its list of gambling activities, which is interesting considering these schemes would violate state gambling laws in the US according to Tufano.  Whilst there is no evidence yet to suggest such schemes are encouraging greater gambling involvement Tufano is now looking closely at the results of Save to Win to assess whether the savings accounts are giving rise to new gambling behaviour.  Others also argue that such schemes are regressive and that governments should be encouraging citizens to save by promoting the benefits of saving, rather than taking away the benefits of saving (i.e. interest) and replacing this with a slim chance of winning a prize.

The attraction of lottery or prize linked saving schemes is undeniable.  In the UK it is estimated up to 40% of the population could hold Premium Bonds.  The attraction of the lottery is undeniable.  In the UK 59% of the population bought lottery tickets in 2010.  The question is whether such schemes will take-off in new markets, such as the US, a key factor being whether the benefits outweigh the potential pitfalls.  Also the math behind such schemes requires large participation to make them attractive.  Whilst historical evidence in other countries suggests they could become very popular, overcoming the legal hurdles associated with offering hybrid savings and gambling products may mean that US citizens have to wait a little while longer before schemes such as Save to Win become widely available.

The Gambling Industry and Academia - Should They Collaborate?

A topic of interest within the gambling industry is the question as to what extent research and services to tackle problem gambling should be funded by the industry.  The topic is not new and has been debated for many years.  It was highlighted in Bet Buddy’s and City University's research paper last year and more recently was brought to attention in Professor Jim Orford’s new book called An Unsafe Bet: The Dangerous Rise of Gambling and the Debate We Should Be Having. 

Professor Orford states that government, service providers and academics are trapped in a consensus view about the benign nature of gambling expansion and are compromised in their ability to seriously challenge gambling expansion.  Orford argues that the independence of the academic community is crucial in areas such as tobacco, alcohol and gambling, however he states that there’s a growing risk that gambling research is being co-opted to serve industry interests.  Whilst some of the Orford's anti gambling expansion recommendations will not sit well with the industry (e.g.”UK based gambling internet sites should be made illegal”) it is a well written and researched book and provides an interesting overview of many issues within the industry.

There is no doubt that some conflicts of interest will always exist in collaborations between the gambling industry and academia.  However does this mean that they shouldn't collaborate?  The world is changing, and fast.  As gambling continues to evolve along a steep technology gradient, new and innovative approaches to research are required to keep up with the pace of industry innovation.  Whilst the rise of internet gambling offers exciting new opportunities for research it also requires more multidisciplinary experience and skills to effectively exploit these opportunities.  For example, B2C and B2B operators are best placed to provide access to players and player data and to advise on the features and technicalities of the vast range of online games they develop.  Specialist software analytics providers have the capability of taking player data and quickly identifying the sub-groups of players whose behaviour differentiates them from the norm.  Academics in gambling and psychology are best placed to validate the research underpinning analytical models and the results from them.  It is difficult to find one organisation that has all of this experience and capability under one roof.

So whilst a collaborative approach appears to make sense how does one overcome the conflicts of interest that exist?  Whilst there is no easy solution, academics and the industry working in isolation will not result in fast progress.  One of Orford’s recommendations is that 10% of industry profits should be directed towards problem gambling prevention and research.  Whilst additional funds will no doubt help researchers, forcing the industry to support research in such a manner may not be conducive to building important industry relationships.

An alternative and approach could be for interested collaborators to develop frameworks with which to build partnerships.  Such frameworks could include a series of principles that each collaborating party signs up to.  For example, one principle could be that academics must be held ultimately accountable for the design of research project aims and for presenting results.  Another could be that industry partners have sufficient consultation in the design of research proposals to enable them to fully apply their knowledge and expertise.  All participating parties could be asked to fund their own efforts in any collaboration project independently.  A more controversial principle could be that accountable academics are not allowed to commercialise the results of research that they were accountable for (although commercialising university research does happen).

As with the introduction of new technology, new research approaches would need to be actively tried to assess how effective they are, and either adapted (we are never 100% right first time) or rejected.  There are now examples in the industry where such collaborations have shed new insight into gambling research that could not have been possible without collaboration.  We at Bet Buddy are doing this too and will be presenting our research, undertaken in collaboration with both industry and academic partners, at the Responsible Gambling Council’s 2011 Discovery Conference.  We need academics to keep innovating and advancing research and we need the industry to support them in doing this therefore we believe that despite challanges to making such collaborations work we will see more of them developing as the industry continues to grow and mature.