Is America Ready for a “No-Lose Lottery”? (Update)

Most people don't enjoy the simple, boring act of putting money in a savings account. But we do love to play the lottery. So what if you combine the two, creating a new kind of savings account with a lottery payout?

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

  Freakonomics Radio is sponsored by Southern New Hampshire University. The best investments are the ones you make in yourself, and no one knows that better than Southern New Hampshire University. With more than 200 online degree programs, no set class times, and low online tuition, Southern New Hampshire University is built to fit your life today and set you up for success tomorrow. Education is an investment. Why not make it a smart one? Apply for free at SNHU.edu/freakonomics. Freakonomics Radio is sponsored by PNC Bank. Boring. Great word, bad rep. Yet, time and time again, here at Freakonomics, we find that when something culture-changing

• 0:42Stephen J. Dubner?

  happens, boring things like calculations and careful planning are usually behind it, which begs the question, why not apply it to other aspects of life? Like banking, for example? Well, PNC Bank did since its inception, proving time and again that the best banking strategy isn't the exciting type, but the steady, reliable, definitely not YOLO type. PNC Bank: brilliantly boring since 1865. Brilliantly boring since 1865 is a registered mark of the PNC Financial Services Group, Inc. PNC Bank, National Association, Member FDIC. Freakonomics Radio is sponsored by Amica. You know what they say, if you want to go fast, go alone.

• 1:25Stephen J. Dubner?

  If you want to go far, go together. So, go with Amica and get coverage from a mutual insurer that's built for their customers, one that looks after what's important to you together. Auto, home, life, and more, coverage that fits your unique needs. Amica helps you protect what matters most. Visit amica.com and get a quote today. Freakonomics Radio is sponsored by ChatGPT. ChatGPT work is a new way to work in ChatGPT. ChatGPT work can pull info from across your apps and connect to your tools to help you create finished work.

• 2:05Stephen J. Dubner?

  You can even automate work in ChatGPT with the Scheduled Tasks feature, and the whole time, you stay in control. Put ChatGPT to work on your most ambitious ideas and projects. Get started at chatgpt.com by selecting Work Mode, available on Plus and Pro plans.

• 2:34Stephen J. Dubner?

  One of our favorite things to do on this show is present a new idea, or maybe a new way to think about an old problem. Way back in 2010, the first year we made Freakonomics Radio, we did such an episode, unbeknownst to us, one of the people who heard it was so inspired by the idea that he would spend much of the next seven years turning it into something real.

• 2:58Speaker 01

  Knowing that this had been a podcast that turned into an idea that ended up becoming a constitutional amendment and that I had a piece of that thing that had happened, it was just super exciting.

• 3:09Stephen J. Dubner?

  That's Michael Gaudini.

• 3:10Speaker 01

  Yeah, and I am a policy advisor with the city of Austin.

• 3:14Stephen J. Dubner?

  In 2010, he was a 21-year-old college senior in Pennsylvania, interning in a state legislative office.

• 3:21Speaker 01

  And I was really kind of trying to get involved more in public policy at the time. And I listened to the Freakonomics podcast on prize-linked savings. And I thought it was a really cool idea that was pretty common sense.

• 3:35Stephen J. Dubner?

  And what you may be wondering is prize-linked savings?

• 3:39Speaker 01

  So a prize-linked savings account is basically just a savings account in which you're incentivized to put more money into your savings account.

• 3:46Stephen J. Dubner?

  The incentive comes in the form of cash payouts, kind of like a lottery, but unlike a lottery in that even if you don't win, you still have your principal.

• 3:56Speaker 01

  We kind of wanted to harness the same type of feeling that you get when you play the lottery. And I thought that it just made sense and had the potential to have like a broad spectrum of support across, like, no matter what part of the aisle you sat on.

• 4:11Stephen J. Dubner?

  Gaudini happened to sit on the Democratic side of the aisle, first in Pennsylvania, where he pitched the idea, and then when he moved to Texas to work in the state legislature there. He was patient and stuck with it through the very slow political process. Finally, this November, he was on the ballot in Texas.

• 4:28Speaker 01

  Proposition number seven was an authorizing amendment that would allow banks and credit unions in the state of Texas to offer prize-linked savings accounts as a savings option for folks that have accounts there. And it passed by, I think, a pretty solid margin. I think it was something around 60% in favor. And so here we are today.

• 4:49Stephen J. Dubner?

  So here we are today. We thought, therefore, it might be nice to replay for you the original episode that inspired 21-year-old Michael Gaudini. Who knows? Maybe you'll be inspired to do something with it.

• 5:05Stephen J. Dubner?

  There's something Peter Tufanow wants to know about you. If you had to, could you come up with $2,000 in 30 days? That's the question he asked a whole bunch of people in 13 countries, including the US.

• 5:19Speaker 02

  Why $2,000? Because an auto transmission is about 1,500. Most estimates of what everyday emergencies are about are in that order of magnitude. If you were to have a sick or ailing relative on the other side of the country and you had to buy full-price plane tickets, it could easily be that amount. And then, why this language "come up with" as opposed to "save"? Because what we wanted to see, if people had access to resources between savings and credit and friends and family. And about half of Americans are not able to come up with $2,000 in 30 days, which means that they stand only one emergency or crisis away from really quite dire circumstances. This isn't picked up in the national economic statistics. This is picked up at a much more local level, at a much more intimate level,

• 6:04Speaker 02

  at what happens inside families. It's this lack of savings, as it were, that motivates me.

• 6:11Stephen J. Dubner?

  Tufanow is all about the motivation. He's a professor at the Said School of Business at Oxford, and one of his specialties is consumer finance. He wants to know how many checks you write and for what, how much you borrow and why. And he wants to know how much you spend on beer, on toys, or on lottery tickets.

• 6:41Speaker 03

  From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 6:57Stephen J. Dubner?

  Americans are generally terrible at saving money. Think about what Peter Tufano just said. Half our country doesn't have enough money in the bank to survive one breakdown. And it's not just poor people. In Tufano's survey, only 25% of the people who earn between $100,000 and $150,000 a year could come up with that $2,000 in 30 days. We are, however, excellent at spending money. Houses, cars, clothes, books, electronics, and lottery tickets. Households that play the lottery spend, on average, about $1,000 a year on tickets. That's more than a typical household spends in grocery stores on dairy products and beer

• 7:42Stephen J. Dubner?

  combined. This year, Americans will buy about $60 billion worth of lottery tickets. The other day, I went to a store at Penn Station in New York called Carlton Cards. It's pretty big. In the back, there are rack upon rack of greeting cards and some candy bins, but there weren't any customers back there. All the customers were jammed up front at the lottery counters. According to the New York State Lottery, Carlton Cards sells more lottery tickets than any other store in New York. Karit Prajabadi is one of the managers. I asked him, how much lottery revenue does his store take in, in a year?

• 8:20Speaker 04

  It's about $8 to $9 million a year.

• 8:25Stephen J. Dubner?

  Holy crap, $8 to $9 million a year in lottery sales in one store in Penn Station?

• 8:30Speaker 04

  Yes.

• 8:31Stephen J. Dubner?

  Okay, you see people buying tickets all day, you see winners a lot. Tell me how excited they are when they win.

• 8:36Speaker 04

  When they win, they forget about all those losses, and they get excited, like they win something. Whatever they lose, but they just care about their wins.

• 8:44Stephen J. Dubner?

  They give you a hug? They give you a kiss?

• 8:46Speaker 04

  Not really. Just handshake probably sometimes.

• 8:49Stephen J. Dubner?

  That's probably all you... You really probably don't want the hugger.

• 8:53Speaker 04

  No, not really.

• 8:55Speaker 05

  When I was in graduate school, there was a local little store by my graduate student housing unit, and I would stop there on the way home and pick up milk and orange juice and notice lots of people buying lottery tickets.

• 9:08Stephen J. Dubner?

  This is Melissa Carney. She teaches economics at the University of Maryland.

• 9:12Speaker 05

  And so I just started chatting with the vendor, and he said, "Oh, I have people coming in spending hundreds, thousands of dollars on lottery tickets a month, a year." And so, being a graduate student, I just downloaded some data and started playing around. I was struck, in particular, people do spend a lot of money buying lottery tickets. And so it was just sort of a passing curiosity, really. I started wondering about what were they not buying in order to buy lottery tickets?

• 9:37Stephen J. Dubner?

  So, let's walk through some of the numbers on lottery gambling. In the U.S., how many people play the lottery?

• 9:43Speaker 05

  Half of U.S. adults surveyed say they play the lottery at some point in the past year.

• 9:49Stephen J. Dubner?

  And would that make it the most popular form of gambling in the U.S.?

• 9:52Speaker 05

  Yeah, so by far. So, 2 out of 3 American adults report gambling, and 50% say they play lottery. The next closest is casino, which is about 1 in 5 adults.

• 10:04Stephen J. Dubner?

  Why do so many people play the lottery? Because it's fun! For $1 or $2, you buy the chance to dream big. This remarkable bargain illustrates a phenomenon, a probabilistic oddity, that economists call skewness.

• 10:23Speaker 05

  That's the idea, that there's some big prize way out there that corresponds to a very small odd, but there's some potential of capturing that. And that's what your typical money market account can't give you. So, you can have $1,500 in your money market account, and every month you might earn $1 on it, but there's no chance in every month will you earn $100,000 or even $10,000.

• 10:49Stephen J. Dubner?

  Now, I know as an economist, you're not trained to answer this question, but as a human being, tell me, why is skewness so important to us?

• 11:01Speaker 05

  That's the chance of changing your life, right? That's the return, you know, that's the big win outcome that might allow you to buy a beach house, or, you know, to send your kids to college, you know, or if it's less far out in the distribution, that might be what you need to make a down payment on a house, or buy a car, or throw your daughter the wedding you want to throw her.

• 11:23Stephen J. Dubner?

  For a lot of people, skewness has an irresistible appeal. And so, a handful of researchers like Melissa Carney are trying to harness its power, the unlikely chance of changing your life with a big prize, in order to solve America's low savings rate. The idea is a new financial product that combines the thrill of the lottery with the goal of, say, accumulating more than $2,000 in a savings account, so that a broken transmission doesn't become a full-blown crisis. Here's Carney's pitch.

• 11:57Speaker 05

  So, we know Americans like gambling. They always have, the majority of them do it, and they're going to keep doing it. And so, what we do is take seriously the idea that people want some small chance of winning a large sum of money. That market, that asset, is missing from the American landscape, okay? Low-wealth individuals, the only asset available to them that gives them some chance of accumulating a large amount of money is the state lottery. And in fact, you know, a recent national survey of 1,000 adults, 1 in 5 American adults said their greatest chance of accumulating, you know, hundreds of thousands of dollars was through the lottery.

• 12:42Speaker 05

  That number jumps to 40% for folks making less than $25,000 a year. So, you know, a lot of Americans think the lottery is their only chance at winning big sums of money. Why don't we take that appetite for gambling, for a product like this? And...

• 12:59Speaker 05

  Attach it to a savings vehicle that offers some positive return. It's a win-win situation.

• 13:05Stephen J. Dubner?

  That win-win situation and the chance to make it happen in the US has generated a lot of enthusiasm among economists like Carney and Peter Tofano. He's the man who's been researching what are called prize-linked savings, or PLS, all over the world.

• 13:21Speaker 02

  I started in the UK because they have a product called Premium Bonds, which has been around for about 50 years, a little bit more, and where the government offers a savings product to investors, which at first glance would look almost perverse. Give us your money and we promise you no interest. But that's not quite how the program works, because it's give us your money, you can take your money out at any time, and each month, we're going to take basically the interest pool and we're going to lottery it off, so that one lucky person will become a millionaire. And literally every month, someone in Britain gets a knock on their door from Mr. Million or Millionaire, who tells them that they've won the million-pound prize. There are, I believe, over 100,000 other people in the UK who find that they've learned smaller prizes.

• 14:04Speaker 02

  This was an intriguing concept, and so the research that I had done tried to understand, was this more like gambling or savings? Bottom line, it's both. Then I, this travel took me to South Africa, where I met Robert Kype, and he was creating a product called MAMA, the Million a Month Account. And I think in a word or in a phrase, he described the entire economics and in some sense, the value proposition for savers quite simply. Everything to gain, nothing to lose. It's a savings account where you can take your money out when you'd like, you always have access to your principal, and it will never go down in value. You may come out with a little bit of interest, or you may come out with a little bit of a payment, you may come out with a remarkably large payment, but you can only go up and you can never go down.

• 14:50Speaker 02

  And then, in respect to the extensive work on behavioral economics and behavioral finance, the logic of this product is quite obvious. People have what's called loss aversion. They much prefer to protect against losses than to worry about gains. They tend to misestimate small probabilities. But when you put it all together in very plain English, people would rather have a small chance at a life-changing payout than an almost certainty of a pittance. So I can be guaranteed, in this interest rate environment, to put my money away and maybe be able to buy a coffee with the amount of interest that might come off a $100 account. Whereas, I'm willing to say, I'll give up that interest, but there's some possibility,

• 15:33Speaker 02

  remote as it might be, that I might be able to have a life-changing payout, an amount that would allow me to buy a car, or a house, or even more. So this preference for highly skewed payoffs, or the kind of payoffs that would normally be present in gambling or lottery products, when combined with savings, turned out to be tremendously effective around the world. But it was completely absent, for legal reasons, in the United States.

• 16:04Stephen J. Dubner?

  So what are those legal reasons? As Tofano discovered, state law typically prohibits something like a prize-linked savings account because it's a lottery. And according to state laws, the only legal lottery is a lottery that's run by the state itself. Nice monopoly, if you can get it, right? You can hardly blame states for keeping lotteries to themselves. They generate billions in revenues. And so while most states might like to help their citizens save more money, they may not be willing to pit their own lotteries against ones that might be run by, say, a bank. But as Tofano discovered, in the state of Michigan, there was a loophole. In 2009, he got a group of credit unions to pilot the idea. Here's Dave Adams, CEO of the Michigan Credit Union League.

• 16:51Speaker 06

  You know, banking can actually be pretty boring. It's not like we go to social events and talk about how much we're saving and talk about a great new feature on our new checking account. Banking services are pretty mundane. So what people want and need is a fun way to save. And in Michigan, we've come up with what we think will accomplish that. It's a program called Save to Win. And what it is, is it's using a lottery concept so that if someone saves, for every $25 they put into one of these one-year certificates of deposit, they're going to get a chance at cash prizes. And the cash prizes are given out every month by participating credit unions, ranging from $50 to $500.

• 17:35Speaker 06

  And then there's a grand prize at the end of the year, an opportunity to win a $100,000 grand prize. So Save to Win gives people what they need, which is they need to save more, while giving them what they want, which is a fun way to do it, a game of chance that makes it interesting to save.

• 17:52Stephen J. Dubner?

  Something that you will want to talk about at a party, say, "Hey, I won $100,000."

• 17:55Speaker 06

  Exactly.

• 17:56Stephen J. Dubner?

  Yeah. So you're making savings sexy by introducing a lottery element.

• 18:01Speaker 06

  I think so. I think, I don't know if it's, so far as to say that it's sexy, but it's certainly far better than talking about the 0.5% that I'm getting on my savings account at the bank. So now you're getting a competitive interest rate, you're doing what you know you need to do, which is to be more responsible in the way that you save and plan for the future. But gee, you're getting a chance at some of these cash prizes, including a chance at a $100,000 cash prize. And the odds of winning are much better than what you would see if you were buying Lotto tickets.

• 18:34Stephen J. Dubner?

  Even with the sputtering 2009 economy and low interest rates, a handful of credit unions in Michigan opened 15,000 new savings accounts. We spoke with the first big winner of the Save to Win program, 87-year-old Billy June Smith. So you put $75 of your own money into a credit union savings account.

• 18:59Speaker 07

  Right.

• 18:59Stephen J. Dubner?

  And as a result, you were entered into a lottery for which you won $100,000.

• 19:05Speaker 07

  Right.

• 19:06Stephen J. Dubner?

  Well, that sounds like a pretty good deal to me. What do you think?

• 19:09Speaker 07

  Well, it is.

• 19:12Speaker 07

  It has helped me a lot.

• 19:15Stephen J. Dubner?

  Now, tell me what you've done with the money, Billy.

• 19:17Speaker 07

  Well, I've had to replace the furnace just a month ago. And I've put in water softer. And I have put my money aside for the taxes. And I do have another savings that I don't touch for just so long. And I can add to it then.

• 19:44Stephen J. Dubner?

  When Save2Win surveyed some of its customers, they learned that more than 60% of them had either played the lottery or gambled in the previous six months. 55%, meanwhile, had had no savings plan. Save2Win was beating its goals and reaching the customers it was supposed to reach. It makes you wonder, what would happen if a program like this took over an entire country?

• 20:08Speaker 08

  Well, my name's Robert Cape. I worked at First National Bank for 11 years, where I headed up the Investment Product House, which was a business unit that really focused on retail deposits, both consumer and corporate deposits. And our focus was trying to look at ways of growing the funding base of the bank.

• 20:32Stephen J. Dubner?

  First National Bank, or FNB, is in South Africa. In 2005, it started what would turn out to be a phenomenally successful prize-linked savings program. It was born out of South Africa's financial problems as the country struggled to put the apartheid era behind it. Millions and millions of black South Africans did not use banks for anything. Robert Cape wanted to find a way to get some of them in the door.

• 20:59Speaker 08

  Now, in South Africa, because so much of the population is unbanked, so much of the savings are literally sitting under mattresses. Now, this has got a double effect. The one that it does really do badly at is it removes that funding from the mainstream banking environment. So it can't be harnessed to lend out and fund economic growth because retail funding tends to come in from consumers and then get lent out to businesses who can then create jobs.

• 21:37Speaker 08

  So that was the one problem. And the second problem was really that these people with the money under their bank accounts were excluded from the banking system. And by being excluded from the banking system, you miss out on so many benefits which really help with people's individual development. For example, developing credit records, being able to be less exposed to having your money stolen or lost on the way home.

• 22:04Stephen J. Dubner?

  But Cape's bank had a problem. Interest rates at the time weren't keeping up with inflation, so putting your money in a plain old savings account might actually erode its value. Cape's job was to make it worthwhile for customers to deposit new money. So instead of simply offering an account with a scrawny interest rate, he'd offer an account with practically no interest rate at all. But it came with the chance for a really big payday.

• 22:30Speaker 08

  So what we did, we literally pooled all of these little 0.25% of interest.

• 22:36Speaker 08

  And then what we did, we paid out that interest in lump sums to a few people. So we paid out 150 people a month in lump sum prizes. So the first prize would be a million rand, which is an enormous amount of money in South Africa.

• 22:54Speaker 08

  And then there were three prizes of 100,000 rand, and then we went down to 20,000 rand and a few prizes of 1,000 rand. So really what we did, we just collected the little bits of interest that would be paid on all these little accounts and then paid it out randomly to a few select, like you and us.

• 23:12Stephen J. Dubner?

  So let's say I live in South Africa. I take the money I'm earning and put it under my mattress or maybe buy some high-risk equities. You're offering me the security of a bank account and the excitement of a chance to win a million rand, right? What do you call this idea?

• 23:26Speaker 08

  We called it the Million a Month Account.

• 23:28Stephen J. Dubner?

  MAMA.

• 23:29Speaker 08

  And MAMA became the trivial name for it.

• 23:36Stephen J. Dubner?

  And you're the man who gave birth to MAMA.

• 23:39Speaker 08

  Yes.

• 23:40Stephen J. Dubner?

  How successful was MAMA?

• 23:42Speaker 08

  Hugely. Probably too successful for its own good.

• 23:46Stephen J. Dubner?

  MAMA attracted a million new customers to Cape's Bank. Other banks in South Africa took note and complained to regulators. And then came the South African state lottery.

• 23:59Speaker 08

  Well, we engaged with them before we launched. We wrote to them and asked them their opinion on the product. They wrote us a letter back saying that they didn't think it was a lottery. They thought it fell into a promotional competition, part of the legislation, and that suggested that we just comply with the requirements of the promotional competition. And we launched, and then nothing was heard from them for six or so months. And then they contacted us to say, actually, they don't like what we're doing, and they think that it's a lottery now.

• 24:32Stephen J. Dubner?

  So when you were starting out and there was very little money in your coffers, they thought it wasn't a lottery. But then after it got going for a while, and you had how much, a couple hundred million dollars?

• 24:44Speaker 08

  About $200 million by the time we closed down. But more importantly, it was over a million customers that we had brought in.

• 24:53Stephen J. Dubner?

  And the National Lottery Board changed its mind then. It thought, oh, that thing that we said a little while ago was not a lottery now looks a lot like a lottery.

• 25:02Speaker 08

  Yes.

• 25:03Stephen J. Dubner?

  And what did they do then?

• 25:05Speaker 08

  They then took us to court to have... Well, we first engaged with them and tried to discuss it, but it was very clear that they were in no position or not wanting to even try to discuss what the issues were. And so they took us to court to have us close down.

• 25:21Stephen J. Dubner?

  Hugh Malamduwitz is the man who took MAMA to court. He's a lawyer who represented the South African National Lottery. Malamduwitz argued that First National Bank's MAMA program infringed upon the state lottery's right to be the only game in town. The case went all the way up to South Africa's Supreme Court of Appeals, and Malamduwitz won every time. Hugh, you must be very good.

• 25:47Speaker 09

  I can't answer that.

• 25:50Stephen J. Dubner?

  Now, when MAMA was created, about 70% of low-income South Africans were said to be unbanked. The government was eager to cut this number. MAMA made it easy to get people in the bank. All they had to do was deposit a minimum of 100 rand or about $15 into a 32-day call account, or what we'd call a certificate of deposit. So Hugh, what's wrong with that?

• 26:11Speaker 09

  Well, I suppose it is an inducement to bank, but for the period in which your money is deposited in the bank, you do not receive any interest. South Africa has a relatively high interest rate. The part of the motivation around the account was touted as being a no-cost account, which was correct, but also there was no interest earned. And South Africa, on a 32-day call account, your interest rate is fairly substantial. So for the days when your money wasn't, you weren't earning any interest whilst it was sitting in the bank

• 26:53Speaker 09

  accounts and the bank was earning substantial sums. I think the idea was that it was driven towards the unbanked and hence the minimum amount of 100 rand. But realistically, substantial amounts were being deposited into accounts with the chance of affecting the million rand return.

• 27:14Stephen J. Dubner?

  Now, how successful was the savings plan run by FNB in actually drawing in money from either the previously unbanked or citizens at large? How much money did they take in? In what period of time?

• 27:26Speaker 09

  Well, there was substantial money taken in, not necessarily from the unbanked. My understanding is that substantial funds came from their regular customers, and really the customers who had sufficient means that they had the, essentially free money sitting around that they could afford to put aside for the 32 days without affecting any return or any real return. So my understanding is that the funds were deposited not predominantly by the unbanked, but really predominantly by the banks, and then I would imagine predominantly by the more wealthy customers. The return that the bank made was fairly substantial.

• 28:11Stephen J. Dubner?

  Milandowicz's argument seems a bit at odds with itself. He says the bank took advantage of people by failing to give them a high interest rate, but also that most people who bought into MAMA weren't the unbanked, that they were wealthier customers who had, as he puts it, "free money" sitting around. Well, if they want to play the bank's lottery instead of the national lottery, why shouldn't they be free to choose? But Milandowicz was doing his job, protecting the interests of his client, the national lottery, and it worked. MAMA was shut down. Robert Cape, the man who created MAMA at First National Bank, stands by its success. He says the excitement of the lottery payout got people in the door so fast

• 28:53Stephen J. Dubner?

  that the cost of acquiring a new bank customer fell from $300 to $5. But that was MAMA's goal in the first place, to expand banking. Cape says 20% of MAMA accounts were opened by people who were previously unbanked. Sure, it wasn't the majority, but MAMA reached that level in just the first three years, and it took in $200 million in deposits. After MAMA was shut down by the national lottery, Robert Cape was invited to Washington DC to talk to federal banking officials about the program's success.

• 29:33Stephen J. Dubner?

  Coming up next, when you play a state lottery, the state likes to keep quite a bit.

• 29:39Speaker 05

  Yeah, oh yeah, it's a lot of money they take off.

• 29:42Stephen J. Dubner?

  And has the US Treasury Department thought about breaking up the state lottery monopoly?

• 29:47Speaker 10

  One of the things that I've learned in my role at Treasury is that picking fights that one doesn't have to pick is not the wisest course of action.

• 30:11Stephen J. Dubner?

  Freakonomics Radio is sponsored by Quince. You know those pieces in your closet that you find yourself wearing on repeat? The sweater that goes with everything? The perfect pair of pants? Or the tea you somehow always reach for first? Those are the pieces that make getting dressed easy, and that's what Quince does best. Quince focuses on high-quality wardrobe staples made with premium materials like 100% Mongolian cashmere, organic cotton, and merino wool. The styles are timeless, versatile, and designed to become the dependable pieces you reach for day after day. And it's not just clothing. Quince brings that same approach to everything they make, from hotel-quality bedding and bath to kitchen essentials and thoughtfully designed furniture. Find your next fall favorites at Quince.

• 30:54Stephen J. Dubner?

  Download the Quince app for app-exclusive offers or go to quince.com/freak. Get free shipping on your order and 365-day returns. Now available in Canada and the UK, too. That's Q-U-I-N-C-E.com/freak. Freakonomics Radio is sponsored by PNC Bank. Boring. Great word, bad rep. Yet, time and time again, here at Freakonomics, we find that when something culture-changing happens, boring things like calculations and careful planning are usually behind it. Which begs the question, why not apply it to other aspects of life? Like banking, for example.

• 31:35Stephen J. Dubner?

  Well, PNC Bank did since its inception, proving time and again that the best banking strategy isn't the exciting type, but the steady, reliable, definitely-not-YOLO type. PNC Bank: brilliantly boring since 1865. Brilliantly boring since 1865 is a registered mark of the PNC Financial Services Group, Inc. PNC Bank, National Association, Member FDIC.

• 32:03Stephen J. Dubner?

  Freakonomics Radio is sponsored by hotels.com. Hotels.com helps you find and book the right stay for work faster. With business preferences, save your travel must haves like gym access or breakfast just once, then get tailored results whenever you search for work travel. Plus, with a free membership, you can save up to 20% on hotels and earn rewards on every stay for future travel. Book now at hotels.com. Visit hotels.com for details.

• 32:40Stephen J. Dubner?

  Today, we are revisiting an episode from the Deep Archives of Freakonomics Radio from 2010 because one listener who heard it way back then, Michael Gaudini, took the idea and spent seven years working to make it a reality. He finally got his way this past election day when Texans passed a state constitutional amendment allowing credit unions and other financial institutions to offer prize-linked savings accounts. Now, why did such a relatively simple idea require something as drastic as a constitutional amendment?

• 33:12Speaker 01

  So, in the state of Texas, the state basically had a monopoly on lotteries. And because this was considered a lottery, it could not go forward without an amendment to the state constitution.

• 33:30Stephen J. Dubner?

  It's hard for anyone but the government to run a lottery when the government thinks the only lottery should be run by the government itself. And that has been the biggest obstacle to bringing PLS plans to the United States. The biggest lottery in this country is run by New York State, which today generates more than $9 billion in annual sales. But in order to get there, New York, like most states that have a lottery, had to rewrite its existing laws that prohibited any kind of gambling. Here's former New York State Lottery Director Gordon Medenica.

• 34:01Speaker 11

  New York first began in 1967, and it was the second state after New Hampshire to come in.

• 34:06Stephen J. Dubner?

  What was the original impetus? Was it a budget shortfall essentially? Did the state feel, "We need money. We can void this ban on gambling in the state and come up with a way to do it?"

• 34:17Speaker 11

  I think it was both a desire to raise money and also, I think, it was a recognition that playing was going on anyway. And it was an attempt to tax and regulate an activity that they knew was very common among citizens. And, you know, whether you go back to the, you know, the numbers games that existed in urban areas, and quite frankly, still exist, or those kinds of activities, and even sports betting today, which of course, technically is illegal, but we all know is a huge business. And I think there was a recognition on the part of lawmakers that, much like prohibition, better to tax and regulate than to, you know, ostensibly call something illegal and pretend it doesn't go on.

• 35:01Stephen J. Dubner?

  State governments do more than tax and regulate their lotteries. They take a generous cut for themselves. In gambling circles, the commission, taken by whoever operates the game, is known as the rake. With state lotteries, the rake can be as high as 60%. That means that as little as 40% of the money taken in from ticket sales ends up in the pool that pays the winnings. The rest of the money usually goes to education. It's an extra tax for schools, but paid only by people who play the lottery. And it goes to cover overhead, marketing, and sales commissions. Compare the lottery's rake to the slot machines in a casino. They pay out more than 90%.

• 35:43Speaker 05

  Yeah, oh yeah, it's a lot of money they take off.

• 35:46Stephen J. Dubner?

  That, again, is economist Melissa Carney.

• 35:48Speaker 05

  States ostensibly run the lottery, you know, at least initially, it was, "Wow, let's provide an alternative legal lottery product or numbers product, right, to the illegal groups. It'll be transparent, it won't be corrupt." But then they declare themselves monopolies and they take a big cut, which is, we can think that's a really high price, right? Consumers are paying a very high price to buy this type of product. They can't get it from anywhere else legally. And then lottery commissions have the mandate to increase revenue. So they innovate, they advertise, they market. Yeah, they behave like monopolists.

• 36:32Stephen J. Dubner?

  What do we know about people who play the lottery? What's, for instance, the socioeconomic breakdown?

• 36:37Speaker 05

  Okay, so this surprises a lot of people, but people throughout the socioeconomic distribution play the state lotteries. And so it's roughly 50% to 60% of men, roughly 50% to 60% of women, roughly 50% to 60% of people across the education spectrum, so people with high school dropouts, high school degree, college graduates. And when you look at the absolute dollars reported spending, it's not that different across the income distribution. So sort of lower-income households spend about as much in dollar terms as higher-income households. The flip side of that, of course, is that it winds up being a larger share of lower-income households' total spending.

• 37:18Stephen J. Dubner?

  So states have a monopoly on lotteries, and the people who can least afford to play the lottery, the people who, in the survey that Peter Tufano conducted, can't raise the $2,000 when their furnace dies, they buy just as many tickets as people who make a lot more money. The lottery's rake is so big that you can reasonably expect to win only about 50 cents for every dollar you pay in. And that's why Peter Tufano and his colleagues are backing prize-linked savings in the U.S. And yet, for now, it's illegal.

• 37:49Speaker 02

  I think the reason that this product exists elsewhere and not here is because of the, I don't want to say accidents of history, but the path that history has taken in America over a long period of time. I'm not a banking expert, nor am I a lawyer, but it's been explained to me that the prohibitions on banks engaging in lottery activities goes back to the 1930s, when, for whatever reason, the activities that some banks pursued made regulators very nervous about them having anything to do with the lottery, which is why you can't walk into a bank and buy a lottery ticket. And so... That may have been a really smart legislation back then, and it may still be

• 38:33Speaker 02

  smart legislation now, but it seemed to have, in this instance, thrown out not only lotteries, but also savings programs that have chance elements to it. So that's half of the equation. The other half of the equation is that, as a public finance matter, American states and localities have relied on lotteries as a way to close public finance deficits. There are other ways to close those deficits, and unfortunately, they're going to be quite large, I suppose, looking in the future. But when public entities were given the right to use this vehicle to raise funds, other parties were prohibited from using this same vehicle, and therefore, there are prohibitions

• 39:17Speaker 02

  against private parties running lotteries in virtually every state. So the combination of laws to try to protect, I suppose, the safety and soundness of banks, and laws to permit states and local governments to have a kind of preferential access to this form of funding, has led to the situation where I think this product, which no one ever meant to outlaw, has become outlawed.

• 39:41Stephen J. Dubner?

  It makes sense that a state-run lottery might see a prize-linked savings plan as a natural rival, but the New York State Lottery, for a little while at least, actually considered teaming up with Peter Tofano on a PLS plan. Gord Medenica again.

• 39:56Speaker 11

  We called it a no-lose lottery ticket. And basically, what the concept is, is that you buy a ticket, and it would be an expensive ticket, let's say $100, but you can never lose the base of it. And then we pool those funds, invest them, just like a mutual fund or anything else like that, and then the investment gains become the prize pools. And then every month or so... Instead of earning almost 0% on savings account, there's a lottery and different account holders win prizes just like you would with a lottery game. So, we went through a lot of this research and we presented to the FDIC, and this was

• 40:34Speaker 11

  an FDIC committee on trying to encourage a higher savings rate among low-income people, and also to embrace what they refer to as the unbanked, and to get low-income people to use banking facilities and financial services better.

• 40:54Stephen J. Dubner?

  Medenica says he couldn't make the math work out for the New York State Lottery, but for the Florida Lottery, it's not about the math, it's about the law. I asked Leo DiBenigno, the former Florida Lottery Secretary, what he thought about a prize-linked savings plan.

• 41:10Speaker 12

  From a purely lottery perspective, I think the Florida Lottery is the only entity in Florida that can operate a lottery game. So if what you described is legally a lottery game, then I've got to say that it probably sounds illegal under current Florida law.

• 41:29Stephen J. Dubner?

  States protect their lotteries because the lottery's bringing lots of money for the states. Some money goes to education and other worthy seeming causes, but even DiBenigno admits that's not what motivates people to play.

• 41:42Speaker 12

  I think people, Floridians in general, are players. They like the idea that their, that the money they spend on the lottery, that a portion of it, and in this case, a significant portion, does go to fund education. But I'm the first to say that they don't play the lottery, by and large, to help fund education in Florida. People play the lottery to win. They like the prizes, they like the excitement, they like the fun, the possibility of winning, you know, sometimes $10, $20, $50, and sometimes many multi-multi-millions of dollars. I think the funding to education is ancillary, it's an extra bonus that the public views

• 42:26Speaker 12

  the lottery as a different and unique and fun way to be able to fund at least some of the things that our education system needs.

• 42:40Stephen J. Dubner?

  The lottery has famously been called a tax on the stupid. You get terrible odds and the state rakes off a huge amount, converting your hard-earned cash into an additional schools tax. Now, you can understand why a state lottery commissioner like Leo DiBenigno of Florida likes things just the way they are. But what about the other government officials who work on things like consumer protection? What about someone like the former Assistant Secretary for Financial Institutions at the Treasury Department? His name is Michael Barr. I asked Barr if he ever played the lottery.

• 43:16Speaker 10

  I haven't really played the lottery. I think probably if I went back over my 45 years, I may have bought a scratch ticket or two in my 20s.

• 43:29Stephen J. Dubner?

  Now, why do you not play the lottery?

• 43:32Speaker 10

  It's a fool's errand. As you undoubtedly know, there are a handful of people who will make some money out of the lottery, but most people, most of the time, will lose money. It's not a great way of spending one's scarce resources.

• 43:48Stephen J. Dubner?

  I don't know if you're aware of the program that's been happening up in Michigan with the eight credit unions where a prize-linked savings program is actually underway. Are you familiar at all with that, called the Save to Win Program?

• 44:00Speaker 10

  I have not actually studied that.

• 44:03Stephen J. Dubner?

  So, the folks who are trying to make this happen come up against a very simple reality, which is that it's typically illegal, that a private institution like a bank or a credit union is not allowed to run a lottery, according to state law. That state law typically forbids gambling, and in order to allow a state, let's say, to run a lottery itself, there's a loophole that must be written, and those loopholes have been written. Most states do have their own lotteries, but for someone else to come in and do it, it would be illegal. If you looked at the landscape and thought, in my role as in Treasury here, I would like to encourage people to save more, I'd like to make it worthwhile for them to save more,

• 44:47Stephen J. Dubner?

  and I'd like to remove barriers that prevent them from participating in projects that let them save more, would you be in favor of sponsoring or trying to get rolling some legislation that would allow for a widespread deployment of prize-linked savings? Do you think that's something that Treasury should get its momentum behind?

• 45:07Speaker 10

  One of the things that I've learned in my role at Treasury is that picking fights that one doesn't have to pick is not the wisest course of action unless it's something that's absolutely essential to take on, and I wouldn't have put that in the category of high priorities to wage into a discussion of state gaming law.

• 45:27Stephen J. Dubner?

  Because you don't, but if your job is to help American families save more and be better financial stewards generally, and we know that tens of billions of dollars are being spent on lottery tickets every year, which you called a fool's game, and one alternative is to offer bank savings accounts whereby a customer can put in $100, enter a lottery, maybe win, probably not, but maybe, and keep the $100, why isn't that something that's worth considering even in a politically fractious environment when the goal seems to be, when

• 46:12Stephen J. Dubner?

  the potential benefit, getting people to save more, seems to be much larger than the potential downside of angering some state lottery commissioners, let's say?

• 46:21Speaker 10

  Steve, I think there are lots of different ways of encouraging greater savings among all American families, and I think we should continue to innovate and to try new approaches. I think that the question that you posed is potentially one aspect of one way to do that. I don't think we yet know enough from the research to say it's the kind of thing that we think needs to happen on a wide scale in order to be effective. And I think that we have a number of potential strategies to help meet the needs of American families to save that we haven't really fully explored and that maybe raise somewhat a lower set of issues and barriers.

• 47:07Stephen J. Dubner?

  All right. So the prize-linked savings idea may not be universally beloved, but up in Michigan, they like it fine. And in fact, since 2009, when Michigan became the first state to allow PLS accounts, more than 20 states have followed suit, with Texas, as we've been hearing today, being just the latest. Now, maybe you think this is a terrible idea. Maybe you think people ought to save money on their own. But you know what? We don't. People respond to incentives. And for a lot of us, the incentive to save for retirement, for emergencies, for whatever, is weak. Why? Well, because the payoff is

• 47:47Stephen J. Dubner?

  abstract and it's too far in the future. It's the opposite of skewness. This dilemma doesn't just apply to saving money. Think of a school kid, a third or fourth grader. You want me to do what? To bust my butt in school for 10 more years and then go to college just to get some job I probably won't like? Or think about crime and punishment. If you look at the data, it turns out that the death penalty does not work as a crime deterrent. Why? Because as it's currently practiced, with the punishment waiting so far out in the future through a maze of delays and appeals, the incentive simply isn't strong enough to stop me from pulling the trigger right now.

• 48:31Stephen J. Dubner?

  Sometimes you need stronger incentives, or maybe some good smoke and mirrors. That's kind of what a prize-linked savings plan could offer. In a country where it's easy to borrow your way to bankruptcy, where you can buy lottery tickets anytime you buy a loaf of bread, PLS is like a big neon billboard that turns a boring old savings account into an exaggeration of itself. "Stick some money in here," it says, "and you just might hit a big payday." And even if you don't, well, your money still belongs to you. I'll buy that for a dollar, wouldn't you?

• 49:14Stephen J. Dubner?

  Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Beray Lamb, whose lucky lottery number is eight. Our staff also includes Alison Hockenberry, Merritt Jacob, Greg Rosalsky, Stephanie Tam, Eliza Lambert, Emma Morgenstern, Harry Huggins, and Brian Gutierrez. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts. You should also check out our archive at Freakonomics.com, where you can stream or download every episode we've ever made. You can also read the transcripts and find links to the underlying research. We can also be found on Twitter, Facebook, or via email at [email protected]. Thank you so much for listening.

• 50:10Stephen J. Dubner?

  Freakonomics Radio is sponsored by EverPure. Is the value of AI not living up to the promise? The problem is probably your data, not your AI models. When it's scattered across different systems, getting your data AI-ready is a challenge. You keep your AI waiting, and everything slows down. EverPure unifies your data so you can see it, understand it, and control it all from one simple place, and get it AI-ready fast. Unlock the true value of your AI at everpuredata.com.

• 50:43Stephen J. Dubner?

  Freakonomics Radio is sponsored by Ozempic. Innovation happens through rethinking what's possible. And when it comes to GLP-1s, Ozempic pill does just that. Learn more about Ozempic semaglutide tablets, 4 and 9mg, by calling 1-833-OZEMPIC or visit Ozempic.com to view the medication guide and ask your doctor what's possible with FDA-approved Ozempic pill.

• 51:12Speaker 13

  Time for a quick break to talk about McDonald's. If you love Chicken McNuggets, now you can get a 20-piece regular or limited-time spicy Chicken McNuggets for $7. That's right, 20 crispy Chicken McNuggets for just $7. Perfect for sharing or keeping them all for yourself. We won't judge. Pair it with a refreshing Sprite. Save time by ordering ahead on the app at participating McDonald's. Cannot be combined with any other offer or combo meal. Price and participation may vary.

• 51:40Speaker 14

  This episode is brought to you by Charles Schwab. Is there a right time to sell a stock? Are you taking the right risks with your portfolio? Financial decisions can be tricky, and often, your own cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab, can help. Join host Mark Reapy as he offers practical solutions to help overcome the cognitive and emotional biases that may affect your investing decisions. Listen at schwab.com/financialdecoder.