Lottery-Like Prizes Coax Savings. What’s the Risk in Expanding Them? | Hacker News Reader

Lottery-Like Prizes Coax Savings. What’s the Risk in Expanding Them?

nytimes.com

45 pointsgumby44 comments

>>> While the state lotteries in the United States don’t achieve those particular goals, they already do some good. Roughly 40 percent of the lottery income is used to finance education, environmental protection and other causes.

That's dubious, because money is fungible. In my home state, lottery money "for education" was matched by a reduction in money for education from the state's general fund.

That's such a good point, the lottery revenues aren't "increasing", they are "replacing" funding.

They are just an alternative taxation but one applied to the dullest and poorest of society.

The premise of the article is that by making the interest on savings accounts a lottery (lower base interest rate with the chance for large lump payouts) seems to appeal to people while simultaneously reducing their lottery spending.

At least in theory, this seems like a great idea. Potentially ripe for abuse, just like a lot of lottery systems (eg. the McDonald's Monopoly conspiracy where employees hoarded the winning tickets).

Hopefully the law can be changed enough to start a larger sized trial.

You could make this pay out better than actuarially-fair prizes, by having the savings fund invest some of the lottery jackpot in call options on a diversified portfolio. That way, the fund would be able to pay out more prizes when the markets are doing well, while still keeping a "baseline" level of draws at all other times. The reason why this would provide better-than-fair payouts is that these options are effectively on the capital markets line, i.e. investing in them is essentially removing risk that other market participants would otherwise have to face!

So kind of like https://www.nsandi.com/premium-bonds ?

Those are government bonds, but it's not far off your idea.

Edit: for clarity, the effective rate paid does vary over time according to interest rates, which usually have some relation to how well the markets are doing.

Its 1.4% at the moment - which is good for the UK

> interest rates, which usually have some relation to how well the markets are doing.

Uh, maybe? There is a positive correlation of sorts, but it's nothing to write home about. It doesn't seem like this product was designed with any attention to the potential of better-than-fair payouts.

... or the operators could simply invest the float for their own benefit above baseline, which is no different from what the operators of a fixed rate savings account might do.

A little over ten years ago I cofounded a startup in Boston that was attempting to do something along these lines. We couldn’t believe how much money people were spending on such a bad investment. We were going to sell our own scratch tickets that had a positive EV. You’d scratch a ticket and reveal a code which could be redeemed for a fractional share(s) of stock in one of a basket of companies. The hope is we’d come close to the entertainment value while at the same time helping people save and earn a massive jump in ROI over regular scratch tickets (which paid 50 to 85% or so). The numbers would work at scale if people liked it. We weren’t the right people to do it, but I hope other people someday will offer something similar. Stockcards is something a little close to it, which is cool to see.

Amazing! I had a similar idea, which was to simulate lottery tickets by selling shares of far-out-of-the-money options. They would rarely pay out, but when they do, it would be a lot.

I think there's a missing point: the convenience factor.

Earlier this week, I went and set up a certificate of deposit. It took half an hour, making arrangements to visit on the rare day their hours didn't clash with mine, presenting two forms of identification, and having a significant amount of money to contribute to the account at once.

I also bought a Powerball ticket the same day, which was a $3 commitment and took 20 seconds at the all-night Kwik-e-mart I was already visiting.

Yeah, people keep coming up with various gimmicks (apps, automatic transfers, rounding up your purchases) to encourage saving, but that still targets an audience fairly high up the curve-- people with savings accounts or at least bank relationships already.

If you made a product reminiscent of the UK Premium Bonds, made them a bearer instrument (to minimize friction in purchase, no account or KYC stuff needed), and sold them in every store that offered Lotto tickets, you'd have a product which could get a lot of people onto the savings bandwagon. You've got $10 to put away? You're undocumented? You're 12? No bank will touch you, but you can start squirreling away these bonds, and in a few years, have a nice little nest egg, even if none of them pay out.

> "But protecting people by ending lotteries isn’t a practical solution: If anything, gambling and state-run lotteries are growing enterprises in the United States and many other countries."

What are the practical problems with banning state-run lotteries as they currently exist? The article doesn't explain this assertion. Is it just realpoltik pessimism over the ability to change the status quo and get state governments to give up an unethical source of revenue? Or is this a standard "prohibition creates criminal opportunity" issue?

The idea of gamified savings accounts seems very interesting. Legalizing gamified savings accounts while also banning traditional state-run lotteries seems like a decent idea to me.

I think the primary issue is replacing the revenue stream the finances along with a host of other state government provided sources. Simultaneously raising taxes and banning the lottery could be a very difficult move politically.

Why tie the two policies together? Gamified savings accounts seems like a good idea on its own.

I'm somewhat confused by the downvote. The article seemed to provide compelling evidence that lotteryesque savings accounts encourage savings, especially among populations who save the least. I'll again ask: Why would such a policy need be coupled with the removal of state lotteries? One could implement it and get benefit regardless of the traditional lottery.

I think you're right, there is no reason the two must necessarily be connected. Although I think the legalization of gamified savings accounts might provide an opportunity to ban state-run lotteries.

"Or is this a standard "prohibition creates criminal opportunity" issue?"

This is exactly it. And it is not something that should be dismissed, it has pretty much been proven correct. In the US, before state run lotteries were present and popular, there were criminal run "numbers games" which were quite similar to lotteries but with much worse payout ratios and where the criminals that ran them often refused to pay for various reasons.

In the Scorcesse classic movie "Mean Streets" one of the storylines is about a kid that wins one of those numbers games but the person that runs the game refuses to pay him because he is of a mixed race.

Numbers games are very rare in the US nowadays and when present are only present in poor immigrant communities that do not know much about the state run lotteries. The state run lotteries did a pretty good job of getting rid of the numbers games and thus depriving organized crime of a source of revenue while providing better odds of success for lottery players and also taking in money for the government and thus saving taxpayer money.

The original lottery idea was also reasonably effective at keeping individual betting volumes low. They did this by making sure that each ticket was relatively cheap and required relatively large amount of work to determine the winner. Thus it was hard for someone to buy many tickets. Unfortunately, this is something that has slowly been eroding as lottery systems try to get more revenue and encourage compulsive buying.

So no I do not think state lotteries should be banned but it may be a good idea to change the rules for advertising or the games themselves to discourage individuals from blowing too much money on them.

This is a very useful perspective on the positives of lotteries. I've always found them to be bogus, borderline theft. But when you consider the fact that it mitigates--almost entirely removing--more shady versions of the game, it makes lotteries seem more like a necessary evil for the time being.

However, that's not to say that the government couldn't do a better job of educating the public on it. Lotteries are definitely aggrandized with all the bells and whistles to make people feel like they have a real shot at winning which I would argue could draw in people who wouldn't have played--lottery, numbers games, or otherwise.

Couldn’t the government do the same for other kinds of vice (drugs, prostitution)? They could permit activities to the level where you get a power law kind of trade-off between consumption and risk from consumption so as to monitor and educate participants over a long period of time (more than 80/20 for behaviour with more detrimental outcomes). You also get the benefit to study the behaviour and figure out how it works in order to have truly effective solutions through repeated experiments etc.

You are 100% spot on. Advertising for gambling should be treated as vice advertising and heavily restricted. Like tobacco, pot, casino, horses or others.

Especially horses. Damn, those spoiled, entitled horse ladies... "I want a pony!" Yeah right.

> In the US, before state run lotteries were present and popular, there were criminal run "numbers games" which were quite similar to lotteries but with much worse payout ratios and where the criminals that ran them often refused to pay for various reasons.

Do you have a source for that? My recollection from my own reading years ago is that the criminal numbers games tended to pay better odds than modern state-run lotteries.

Wikipedia claims 600:1 payout on 999:1 odds was typical. That's about a 60% payout; a published analysis [0] indicates that California lottery games range between under 50% (most games) to nearly 80% (the latter for high-denomination Scratchers.)

So, in general, worse than numbers games, though better if you choose the right game.

[0] https://wizardofodds.com/games/lottery/california-lottery/

I'm aware of the history of "numbers games" and concede that while state-run lotteries were instrumental in their demise, I am unconvinced state-run lotteries are still the optimal way of suppressing organized crime.

Haven't law enforcement tactics particularly against organized crime improved greatly in meantime? While there are important concerns about the scope and application of these laws and regulations, it seems to me that moving around large amounts of cash without the federal government noticing has become more difficult for criminals (and non-criminals) than ever before. And might modern illegal numbers games in immigrant communities be related to notoriously poor law enforcement involvement in those communities, which allows criminal numbers games to remain relatively unmolested?

Maybe I'm wrong about all of that, but something else to consider is whether gamified savings accounts might reduce demand for illegal numbers games just as state-run lotteries do. If gamified savings accounts can suppress illegal numbers games in the same way state-run lotteries do, while at the same time inflicting less harm on economically vulnerable populations, that seems like a win-win scenario.

> Or is this a standard "prohibition creates criminal opportunity" issue?

I'd say it's a bad idea because... and hear me out... people will still have lottery. I present as evidence to my argument the prohibition on drugs, sports betting and prostitution. You can add in homosexuality where it is prohibited. And this even happens in places under penalty of death.

Trying to restrict willing, consenting adults from titillating their senses in private transactions in private property... has been a spectacular failure.

I know, you probably know better for these people than they do. But we are stuck in a world with what seems like humans that enjoy (or suffer from) free will.

How many times does the social experiment of restricting these titillation have to be carried out with all it's high costs before we figure out it isn't worth it.

Lotteries work like a social safety valve. They give hope to the poor that there is a chance, however small, that they will make it big and sort out their financial problems just by winning the lottery.

And so they keep working and trying and living their lives despite the fact that there is basically zero chance of ever earning enough money, because: "Someone wins the lottery every week! Next week it could be me!!".

It's interesting to note that given the oft cited statistic that lotteries are disproportionally consumed by the poor, that amount they are disporportionally consumed and how that statistic is come by might not lead to the conclusions people often jump to:

The data reveal the following general trends. First, lottery gambling extends across races, sexes, and income and education groups. Second, black respondents spend nearly twice as much on lottery tickets as do white or Hispanic respondents. The average re- ported expenditure among blacks is $200 per year ($476 among those who played the lottery last year). Black men have the highest average expenditures. Third, average annual lottery spending in dollar amounts is roughly equal across the low- est, middle, and highest income groups. This implies that on average, low–income households spend a larger percentage of their wealth on lottery tickets than other households.[1]

Those in the lowest fifth in terms of socioeconomic status (SES) had the “highest rate of lottery gambling (61%) and the highest mean level of days gambled in the past year (26.1 days).” Moreover, there were “very few observed differences in lottery gambling for those in the three upper SES groups — 42–43% gambled on the lottery and the three upper groups averaged about 10 days of gambling on the lottery in the past year.”[2]

It's clear that the poorest people may more, and it's more of their relative income, but it's not anywhere near rate for other income groups to play as well.

The real interesting take-aways I see are what you get when you look at the following two facts (shown above):

- The lowest quartile income group only plays about 50% more often than the other quartiles (~60% compared to ~40%).

- Each tertile income group spends approximately the same amount of real dollars.

With these, it starts to look a lot less like some tax on the poor and/or stupid that people like to classify it as, and more as a cultural phenomenon (or something that plays to the human psychology, since I think it's fairly common in most cultures).

It may indeed be that the lottery works as an aspirational tool, as you note. But I think it must also be working in other ways, otherwise I'm not sure why we would see such large investment from higher income groups as well.

1: https://www.ntanet.org/NTJ/58/2/ntj-v58n02p281-302-economic-...

2: https://journalistsresource.org/studies/economics/personal-f...

A savings account with prize interest is still a tax on uneducated people.

The "educated" person will look at the data, realize that they are paying for that prize with a lower interest rate, and switch to a different product.

I know I did - I realized that the savings account paid a lower interest rate to compensate for the prize and decided to not play.

Example from New Zealand: http://www.bonusbonds.co.nz/

They don't have any guaranteed interest!

Analysis: https://www.moneyhub.co.nz/bonus-bonds.html

Term Deposit Rate from same bank:

https://www.depositrates.co.nz/by-provider/6/anz

>A savings account with prize interest is still a tax on uneducated people.

But people aren't completely rational. Playing the lottery isn't something a completely rational person would do.

In general, people with lower incomes have less education. Even highly educated people often have little understanding of the basics of managing money.

Given that it's unlikely lotteries will go away anytime soon, I think it's okay to offer "harm reduction" methods. Even if only 10% of people participated, if they began to move up socioeconomically, it may help others develop better habits.

It is not a tax on uneducated people, it is a tax on stupid people. There are plenty of uneducated people who are smart enough to know that lotteries are a scam.

If increasing the savings rate were actually a priority, then it can be achieved easily. Raise interest rates.

The Fed and its nearly decade long war on savers gave those with money to save essentially negative return on their investment.

It should be no wonder that savers decided to walk.

The desire to get the little person to save more is telling me massive inflation is coming.

Pity the rentier.

Any prize is still taxable income in the USA. That absurdity needs to be removed before this can make inroads. E.g. if you win a car but are very poor then you might reject the car as you can't afford to pay the sales tax on it. I've seen this before.

Views on savings tend to swing extreme in the US, just 13 years ago Bernanke warned against "the savings glut" and the negative effects it was having on US economy.

https://www.federalreserve.gov/boarddocs/speeches/2005/20050...

Can't we have a lottery that, as a prize, provides basic income? Then at least we can use it to do experiments with the concept of UBI.

a) They already do. You're given a choice between a single payout or regular installments over a period of many years (i.e. basic income). b) There's no shortage of BI experiments, both past and ongoing. https://www.businessinsider.com/basic-income-experiments-in-... https://en.wikipedia.org/wiki/Basic_income#Examples_of_basic...

The fact that stupid people spend a lot of money on the lottery is a feature, not a bug. It allows us to extract much needed tax revenue from them without them even realizing it. Because of this, they're happier with government than they would be if they were taxed directly. This reduces the risk of extremist (communist, socialist, nazi, etc) politicians sweeping into power by riding the discontent of the masses.

"...something that truly benefits ticket-buyers: by nudging people to save more or, even, to engage in safer sex."

Whoa. I guess poor people should not be allowed to participate in the joys of family and child raising. How did this get by editorial?

Edit: at the end of the article, the author links sex to health. I apologize, I didn't make it that far. Would have been better to say heath education in the earlier statement...

Did you read the article? The author specifically is not referring to procreation, but rather risky sexual behavior for contracting HIV in Africa.

Not the whole thing, sorry, you are correct.

Because that's not what it's saying? Safer sex means not getting HIV in this context. Similarly, not having unintended children would also be a benefit that does not say anything about forbidding people from raising children if they so choose.

Ya, sorry, I jumped to that conclusion based on an early statement.

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