Kellogg Prof. Benjamin Iverson asks whether gambling can increase one’s personal savings in new research on prize-linked savings accounts, in which savings return no interest but are entered into a lottery for a chance to be multiplied.

The study — conducted by Iverson, Harvard University’s Shawn Cole and University of Oxford’s Peter Tufano — aims to answer two main questions: who chooses to open PLS accounts and how the accounts affect their overall savings amount over time.

The trend toward opening PLS accounts began at the end of 2014 when President Barack Obama signed the American Savings Promotion Act, allowing financial institutions to offer these types of accounts. Prior to this legislation, banks were not authorized to provide lottery-based programs to customers, some of whom face financial constraints.

“These are people who feel like they’re not able to get ahead financially,” Iverson said. “If I have a lot of debt, it’s pretty hard for me to accrue much interest in a regular savings account in such a way that I feel like I’m sort of gaining ground and may be able to pay off that debt.”

The research team observed that within the first two or three months of opening PLS accounts, participants on average increased their total savings by 1 percent of their annual income.

The study also showed the two groups most interested in opening these accounts had no previous transactions with banks or were in debt. The latter group saw greater increase in their savings, Iverson said.

Iverson said PLS accounts may decrease other forms of lottery gambling. Casinos in Nebraska, near which credit unions began offering similar lottery-linked savings programs, saw a 7 to 15 percent decrease in gambling behavior from May 2010 to June 2012, said J. Anthony Cookson, a finance professor at University of Colorado at Boulder, who conducted a similar study in Nebraska.

“In the counties where this is introduced, you see people gamble at the casino less,” Cookson said. “People view this not as an opportunity to gamble, but as an opportunity to get that gambling thrill without losing their principal.”

Illinois legislation, effective Jan. 1, 2016, authorized credit unions and banks to offer the program later this year.
It is not clear whether or not opening PLS accounts benefit their holders in the long run, Iverson said. He said people hesitate to endorse the method because of the stigma surrounding lotteries and their tendency to take more money from participants than they earn.

Doorways to Dreams Fund, a nonprofit organization in Massachusetts that uses nontraditional methods to assist low-income Americans, has promoted lottery-linked savings accounts to make finances more exciting, said Dylan Manley, a junior marketing strategist at the fund. The D2D Fund team is working with more states in passing state legislation on PLS accounts, he said.

“(The accounts) get new customers to start looking at financial institutions who never would have become customers otherwise,” Manley said. “Because it’s not a typical bank account, people are interested in it even if they don’t have bank accounts already.”

Although Iverson said he sees both positives and negatives in PLS accounts, he emphasized that it is worthwhile to investigate new ways to promote saving.

“We’re looking to change the way that we incentivize people to save,” Iverson said.

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