Prize-linked savings incentives really shouldn't work, at least not as much as they have, in the programs that have been implemented in the U.S. so far. Why should just the chance (even fairly remote, in many cases) of winning a cash prize motivate a low-income individual to put aside money that he or she could likely use for immediate consumption, particularly if doing so requires the additional step of going into a financial institution and opening an account? Why should that potential lure be enough to catalyze not just one-time saving behavior but repeated savings habits? Why should a family sacrifice something they want or need today for just the possibility that they could get more tomorrow?
The answers, of course, lie in prize-linked savings' ability to leverage human nature for pro-savings behavior. And the mechanism involved may be very similar to the explanation for why even small-dollar children's savings accounts are associated with significant increases in positive educational outcomes. Because, on their face, those outcomes seem just as illogical: why should having only $1 in an account make a child more likely to enroll in college? Why should having just $500 make one more likely to graduate?
In both cases--small-dollar accounts and prize-linked savings--as in lotteries and other behaviors predicated on chance, humans tend to dramatically overestimate the likelihood of their own positive outcome. They judge that they are quite likely, individually, to receive the prize associated with their saving. They optimistically assume that their own lottery result will be favorable. And they have a rosy estimate of the likelihood of their own future education saving, too, even if they correctly assess that they have limited savings potential right now.
At AEDI, this is one of the elements of prize-linked savings we find most attractive. Certainly, the savings outcomes are often impressive. D2D's prize-linked savings programs (particularly the iterations of Save to Win™), have seen effects that include, in Michigan, 64% of Save to Win accounts rolled over from 2010 to 2011, with more than $70 million saved in more than 40,000 unique accounts. We are excited about innovations that increase saving, particularly when those effects are sustained and are replicated within low-income populations, as well. And, because prize-linked savings operate on the potential for a cash incentive without requiring the actual outlay very often, they are very efficient ways to induce savings behavior, which holds tremendous promise for scaling.
That's all good news, and it's a reason to be excited about policy momentum around prize-linked savings.
But, at their core, these prize-based incentives are premised on a fundamentally hopeful view of the future, and of individuals' ability to be successful in it. An individual saves, we believe, because they simultaneously hold an inflated sense of their own chance of winning and, perhaps, also understand the intrinsic value in their own investment. A parent opens a savings account for their own child both because she wants to do something good for her child's future today, and because she has an optimistic plan to do more good for her child in the future.
We like policy interventions that believe in people--in their future, in their own capacity for change, and in their best intentions.
This is more than just Pollyanna thinking. Our own research suggests that these aspirations and the expectations they induce can be powerful forces shaping behavior in the present, too, capable, on their own, of resulting in more positive outcomes...even if the proverbial ship never comes in.