FREAKONOMICS: Savings security with gambling thrills

A woman fills out her Mega Millions lottery ticket at a Citgo gas station in Russell, Ill.

TEXT OF INTERVIEW

Kai Ryssdal: Yes, it is Freakonomics time. Every couple of weeks, we are back with Stephen Dubner, co-author of the books and the blog of the same name. It is, of course, "the hidden side of everything."

Dubner, good to talk to you again.

Stephen Dubner: Great to be here Kai. Thanks.

Ryssdal: So, I have in front of me two envelopes, which you mysteriously FedEx-ed to me and told me not to open. What gives? I don't like mystery mail, man.

Dubner: It's true. Now, I'm going to go ahead and let you open envelope number one right now. And you're going to find that I have mailed you...

Ryssdal: Wait, wait, hang on! You have mailed me...

Dubner: One genuine $5 New York State lottery ticket.

Ryssdal: This is excellent. My dad used to do these all the time.

Dubner: Well, I'm a lot like him, I've been told.

Ryssdal: Probably that told too, but anyway...

Dubner: Alright, it's a scratch-off now. You see the three boxes there.

Ryssdal: Yes.

Dubner: You scratch off one dollar sign, you get five bucks... Go ahead, I want you to go ahead and scratch away.

Ryssdal: Alright.

Dubner: And I want to know if Kai Ryssdal is a big winner today. I'm hopin', fingers crossed.

Ryssdal: So I'm scratching with this nickel actually that I found lying around in the studio, 'cause we've got money to burn here at Marketplace. There's a nickel in the studio. Alright, I've got an eight, a two and a four.

Dubner: That's no sevens, is it?

Ryssdal: No, no it's not.

Dubner: Alright, I'm afraid you're a loser today -- which only in lottery. But I tell ya, it's just like all of us. We do love to play the lottery in this country. We spend $60 billion a year playing it, but it probably won't surprise you to know it's a pretty bad investment. You do much better just parking your money in a savings account. But, here's the thing: Banking is boring, lottery is fun. So, what if I told you, Kai, that there is a way to combine the two and to jack up the amount of money taht Americans can save.

Ryssdal: Well, obviously, I'd say, "Where do I sign up?", right? I mean it's a win-win.

Dubner: Alright, good. You're playing along. The idea is called "prize-linked savings," or PLS. Here's an expert, Melissa Kearney, who's an economist at the University of Maryland.

Melissa Kearney: 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 and attach it to a savings vehicle that offers some positive return?

Ryssdal: So let's say, Dubner, that I've got a hundred bucks and I'm on my way to buy lottery tickets, but you, Mr. Banker, intercept me and say, what, "I've got a better deal"?

Dubner: Yeah, I'd say, "Come on over to the bank, give me your $100. I'll put it in a special PLS savings account." And now, instead of paying you the typical -- let's say 2 percent interest, which is pretty bad -- I pay you an even worse 1 percent interest rate. I take that other 1 percent and pool it with everybody else's 1 percent, and every month or so, I distribute that extra money by lottery. So if you win, well, you get a big jackpot -- maybe $100,000. And if you lose, you still have the original $100 in your savings account.

Ryssdal: OK, hold on a second though. It's a 1 percent interest rate, which is lousy; banks, as we know, need new customers -- how is this not just some kind of marketing gimmick?

Dubner: Well, it may be a marketing gimmick for the banks. The question is, as a society, do you want more people putting money in the banks, where they keep their original money and maybe get a lottery pay out? Or do you want more people spending money on the lottery, where they only get a little piece of what they put in? So, around the world, about 20 countries have these PLS plans. In the U.K., it's a government bond. Usually, it's attached to a bank. It's being tried out, right now, in Michigan in a handful of credit unions. This year, they've opened 15,000 new accounts, taken in $18 million in deposits.

Here's Dave Adams, who's CEO of the Michigan Credit Union League.

Dave Adams: We're giving them an opportunity to re-direct that behavior that, frankly, most of us enjoy, the opportunity for a game of chance. We're re-directing htat to something really constructive.

Ryssdal: It's never a good thing when the sales pitch is "it's an opoprtunity for a game of chance," right?

Dubner laughs

Dubner: Especially from a banker.

Ryssdal: I was going to say. So, what are the odds that this actually spreads beyond Michigan, though?

Dubner: Well, it's tricky. Michigan law has a loophole that let's credit unions do this. In most states, the only legal lottery is the lottery run by the state itself. Nice monopoly, if you can get it. So I described this PLS idea to Florida Lottery Secretary Leo DiBenigno. I asked him if it might fly in Florida.

Leo DiBenigno: If what you described is legally a lottery game, then I've gotta say it probably sounds illegal under current Florida law.

Dubner: Right. So right now, PLS is essentially illegal in 49 states. Now, you can hardly blame 'em for keeping lotteries to themselves. They generate billions in revenues, by taking this huge cut off the top. It's usually more than 40 percent. From the consumer's end though, the lottery gives you dreadful odds, way worse than any casino.

Ryssdal: Tell me how much the banks are keeping for themselves, though, Dubner.

Dubner: Well, theoretically, it's zero. The prize money comes from shaving off the interest from other depositors. So, if you win, you win. And if you lose... Well, actually, that's what envelope number two is all about, Kai. So go ahead and grab number two.

Ryssdal: Alright.

Ryssdal laughs

Ryssdal: You sent me five bucks, man.

Dubner: Wasn't that nice of me?

Ryssdal: That was nice. So I get what the lottery woulda cost me, is that the deal?

Dubner: That's exactly right. You played, you lost and you still keep your money. That's why the call it the "no-lose lottery." So Kai, I don't want you to think of yourself as a loser today, you're just a guy who didn't win. But you get to keep the original money you bet. And yeah, my expense report for those lottery tickets is in the mail.

Ryssdal: Of course it is. Stephen Dubner from the Freakonomics Radio gang. More of this story is out on the Freaknomics Radio podcast this week. You can get it on iTunes and you can read more at his website. Dubner, we'll talk to you later.

Dubner: My pleasure. Thanks Kai.

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