Prize-linked savings account

Based on Wikipedia: Prize-linked savings account

What If Your Savings Account Could Win the Lottery?

Here's a strange truth about human psychology: we're terrible at saving money, but we'll happily throw cash at the lottery week after week. Americans spend roughly seventy billion dollars annually on lottery tickets—more than they spend on books, movies, video games, and music combined. Meanwhile, about forty percent of Americans couldn't cover a four-hundred-dollar emergency without borrowing money or selling something.

So what if you could scratch that lottery itch while actually building savings?

That's the elegant premise behind prize-linked savings accounts, sometimes abbreviated as PLSAs. Instead of throwing your money into a lottery where you'll almost certainly lose it all, you deposit it into a special savings account where your principal is completely safe. You might not win anything extra, but you'll never lose what you put in. The lottery ticket, in essence, becomes free.

How the Magic Trick Works

The mechanics are beautifully simple. When you deposit money into a prize-linked savings account, the financial institution invests your funds just like they would with any savings account. But instead of paying you all the interest your money earns, they pool some of that interest—or use marketing dollars—to fund prizes distributed through random drawings.

Think of it like this: a traditional savings account might pay you two percent interest, guaranteed but boring. A prize-linked account might pay you one percent guaranteed, then throw the other one percent from everyone's accounts into a pot that gets randomly awarded to a few lucky depositors as larger prizes.

Your expected return is roughly the same. But the psychological experience couldn't be more different.

With a traditional account, you check your balance and see it's grown by a few dollars. With a prize-linked account, you check your balance and discover you've won five thousand dollars. The dopamine hit is incomparable, even if the mathematical expected value is identical.

This Isn't a New Idea—It's a Very Old One

If prize-linked savings sounds too clever to be recent invention, you're right. The concept has deep historical roots.

The United Kingdom's Premium Bonds program launched in 1956, making it one of the oldest and most successful implementations. Rather than paying interest, Premium Bonds enter holders into monthly prize draws. The top prize, currently set at one million pounds, gets awarded to two lucky bondholders every month. Smaller prizes range from twenty-five pounds to one hundred thousand pounds. Over twenty-one million people in the UK hold Premium Bonds, representing about one-third of the entire population.

Ireland offers a similar product called Prize Linked Bonds. Both programs demonstrate that when you make saving feel like a game, people actually do it.

America's Complicated Relationship with Prize-Linked Savings

The United States came late to this party, and the reason reveals something fascinating about how regulatory frameworks can accidentally prevent beneficial innovations.

The problem was that state-run lottery boards viewed prize-linked savings accounts as competition. And they had lawyers.

Many state lotteries enjoy something close to a monopoly on games of chance within their borders. When banks and credit unions started offering accounts that functioned like lotteries—even though depositors could never lose their principal—lottery boards cried foul. They argued these accounts infringed on their exclusive rights to operate lottery-style games.

This created an absurd situation. State governments were simultaneously running campaigns encouraging citizens to save more money while allowing lottery boards to sue financial institutions trying to help people do exactly that.

The first large-scale American prize-linked savings program launched in 2009 in Michigan under the name "Save to Win." It emerged from collaboration between a nonprofit called Commonwealth (formerly D2D Fund Inc.), the Filene Research Institute, and the Michigan Credit Union League. The program's foundation rested on research by Harvard Business School professor Peter Tufano, who had co-founded Commonwealth in 2001.

The research findings were striking. Among participants in early prize-linked savings programs, fifty-six percent hadn't been savers before. The lottery-style structure was converting non-savers into savers—exactly what decades of financial literacy campaigns had failed to accomplish.

The Legal Tide Turns

By 2013, eight states had authorized financial institutions to offer these accounts. The real breakthrough came in 2014 when Congress passed the American Savings Promotion Act, which removed federal obstacles that had been blocking state-authorized programs.

The law introduced a new term: "savings promotion raffle." This linguistic choice was deliberate. By calling these products raffles rather than lotteries, legislators created legal daylight between prize-linked savings and state-run gambling monopolies.

The dam broke after that. By 2018, thirty-three states had passed legislation or taken legal action to clear the way for banks and credit unions to offer savings promotion raffles. Some states limited these products to credit unions only, reflecting the nonprofit cooperative nature of those institutions. Others opened the field to banks as well.

Today, programs like Save to Win operate across twenty-eight states. California has Big Prize Savings. Louisiana offers Lucky Lagniappe—a name that references the regional tradition of giving customers a little something extra. Wisconsin runs Saver's Sweepstakes. Minnesota has WINcentive Savings.

Why Your Brain Falls for This

The success of prize-linked savings isn't random. It exploits several well-documented quirks in human cognition that behavioral economists have studied extensively.

First, there's the availability heuristic. Our brains estimate probability based on how easily we can recall examples. Lottery winners get extensive media coverage—you've probably seen local news stories about someone holding a giant check. This makes winning feel more common than it actually is. Prize-linked savings leverages this same mental shortcut, but for beneficial ends.

Second, people systematically misunderstand small probabilities. We simply cannot intuitively grasp odds of one in ten million. Our daily lives deal with quantities in the hundreds or thousands at most. When something has a one-in-ten-million chance versus a one-in-fifty-million chance, both just feel like "really unlikely but possible." This cognitive limitation, which causes people to waste money on regular lotteries, can instead be harnessed to encourage saving.

Third, there's skewness preference—a fancy term for the appeal of small chances at big wins. Given a choice between a guaranteed ten dollars and a one percent chance at a thousand dollars, many people choose the latter even though the expected values are identical. Prize-linked savings offers exactly this kind of skewed payoff structure.

Fourth, the sunk cost fallacy actually works in savers' favor with these accounts. Once people start depositing money, they often increase their deposits to improve their odds of winning. In a regular lottery, this behavior just means losing more money. In a prize-linked savings account, it means building a larger nest egg.

Who Benefits Most?

Research consistently shows that demand for prize-linked savings accounts runs highest among people with relatively low existing savings. This is precisely the group that tends to spend the most on traditional lottery tickets relative to their income.

Here's a remarkable fact: American families spend roughly the same amount on lottery tickets regardless of their economic status. A family earning thirty thousand dollars per year might spend five hundred dollars annually on lottery tickets—the same as a family earning two hundred thousand. But that five hundred dollars represents a dramatically different share of their household budget.

Prize-linked savings accounts offer the possibility of redirecting that lottery spending toward actual wealth accumulation. For families at the low end of the income distribution, this redirection could meaningfully change their financial trajectory.

The logic is straightforward. If someone is going to spend five hundred dollars chasing the dream of a big win anyway, society benefits enormously if that money goes into savings rather than into the state lottery's coffers.

The Global Experiment

Prize-linked savings isn't just an Anglo-American phenomenon. These products have emerged across an astonishing range of countries and cultures.

Argentina, Brazil, Canada, Colombia, Germany, Indonesia, Iran, Japan, Mexico, Oman, Pakistan, Spain, South Africa, Sri Lanka, Turkey, the United Arab Emirates, and Venezuela have all experimented with various forms of prize-linked savings. The breadth of this list suggests something universal about the psychological appeal.

South Africa's experience offers a cautionary tale about regulatory conflict. The First National Bank created a program called the Million a Month Account, or MAMA, specifically targeting unbanked populations—people who had never had a formal savings account before. The program succeeded in its social mission, bringing new savers into the financial system.

Then the state-run lottery sued, claiming the bank was infringing on their monopoly.

MAMA was eventually shut down. The lottery's lawyers won, but society arguably lost.

The New Digital Frontier

Traditional banks aren't the only players in this space anymore. Financial technology companies—fintech for short—have enthusiastically embraced prize-linked savings.

Apps like PrizePool, Flourish Savings, Yotta Savings, and Long Game offer prize-linked savings directly to consumers through smartphone apps. These platforms can offer more frequent drawings, smaller prizes, and gamified experiences that make saving feel like playing a mobile game.

Even cryptocurrency has gotten involved. Decentralized finance applications—often called DeFi—have created prize-linked savings protocols. PoolTogether, for instance, operates a "no-loss lottery" where users deposit cryptocurrency into a shared pool. The pool earns interest from lending protocols, and that interest gets randomly awarded to depositors. If you don't win, you can withdraw your original deposit at any time.

Qache offers a similar concept. These blockchain-based approaches eliminate the need for a trusted financial institution—the rules are enforced by computer code rather than by bank policies.

Why Banks Actually Like This

Prize-linked savings accounts might seem like they benefit only consumers, but financial institutions have discovered several advantages.

These accounts are operationally simple. The underlying investment strategy typically involves low-risk vehicles like government bonds or money market funds. There's no complex trading strategy to manage. The institution pools interest, runs drawings, and distributes prizes—straightforward mechanics.

They also offer remarkable transparency. Because the prize pool comes from pooled interest, the institution can adjust odds to ensure consistent prize offerings regardless of market conditions. If interest rates rise, more money flows into the prize pool and more people win. If rates fall, fewer people win but the structure remains mathematically sound.

Perhaps most interestingly, prize-linked savings can encourage liquidity management among customers. Some programs deny prize eligibility to depositors who make frequent withdrawals. This creates an incentive to leave money in the account rather than constantly moving it around. For financial institutions managing their own liquidity needs, this behavioral nudge has real value.

The Opposite of Prize-Linked Savings

To fully understand prize-linked savings, it helps to consider what it's not.

It's not a lottery. In a lottery, you spend money and will almost certainly lose all of it. The expected return is deeply negative—state lotteries typically return only about fifty cents for every dollar wagered.

It's not a high-yield savings account. Those accounts maximize guaranteed returns. Prize-linked accounts sacrifice some guaranteed return for the chance at a larger win.

It's not gambling. Gambling involves risking money you might lose. In prize-linked savings, your principal is protected by the same deposit insurance that covers regular savings accounts—up to two hundred and fifty thousand dollars per depositor at FDIC-insured banks in the United States.

It's not investing in stocks or bonds. Those involve genuine risk to principal in exchange for potentially higher returns. Prize-linked savings guarantees you won't lose money.

The closest analogy might be a raffle where the ticket price is fully refundable. You enter the drawing, you have a small chance to win something significant, and if you don't win, you get your entry fee back. The only thing you "lose" is the interest you would have earned in a traditional savings account—and even that loss is statistical rather than guaranteed.

The Behavioral Revolution in Finance

Prize-linked savings represents a broader shift in how economists and policymakers think about financial behavior. For decades, the dominant approach to improving financial outcomes was education—teach people about compound interest, explain the mathematics of saving, and they'll make better choices.

It didn't work particularly well.

Financial literacy programs show surprisingly modest effects on actual behavior. People can understand that saving is important while still failing to save. The knowledge-action gap in personal finance is enormous.

Behavioral economics offers a different approach: instead of trying to change how people think, change the environment to work with existing thought patterns. If people are going to overweight small probabilities of large gains, design products that harness that tendency for beneficial ends. If people respond more to variable rewards than to steady returns, add variability to savings products.

Prize-linked savings is a triumph of this behavioral approach. It doesn't require anyone to become more rational or more disciplined. It just redirects existing irrational impulses toward better outcomes.

What the Numbers Say

The research on prize-linked savings effectiveness is genuinely encouraging.

Studies consistently show these accounts attract people who weren't previously saving. The fifty-six percent figure from early Michigan research has held up across subsequent programs. These aren't existing savers switching from traditional accounts—they're new money entering the savings system.

Account holders tend to maintain their deposits over time. The prize structure seems to create psychological attachment that straight interest doesn't generate. People feel invested in their accounts in ways that go beyond the financial.

The amounts saved, while modest in absolute terms, represent meaningful changes for many households. Moving from zero emergency savings to a few hundred dollars in a prize-linked account could make the difference between weathering a car repair and going into debt spiral.

Criticisms and Limitations

Not everyone loves prize-linked savings. Some critics argue these accounts still normalize lottery-style thinking rather than encouraging genuine financial sophistication. Even if the immediate outcome is positive, the argument goes, we shouldn't build financial products around cognitive biases we should be helping people overcome.

Others point out that prize-linked savings works best for people who are already inclined to gamble. It may do little for those whose saving failures stem from other causes—pure lack of income, competing financial obligations, or different psychological barriers.

The prizes themselves raise equity questions. When one depositor wins a large prize, that money came from interest that would have been distributed across all depositors in a traditional account. Prize-linked savings creates winners and losers, even if no one technically loses principal. Some people will get less than they would have in a regular savings account.

There's also the question of whether financial institutions are the right entities to be running what amount to lottery systems. Banks are regulated for safety and soundness. Lotteries are regulated for fairness and consumer protection. Prize-linked savings falls somewhere in between, and regulatory frameworks are still catching up.

The Road Ahead

Despite these concerns, prize-linked savings appears to be gaining momentum. The combination of regulatory liberalization, technological innovation, and growing acceptance of behavioral approaches to finance suggests these products will become more common.

The fintech applications are particularly interesting. Smartphone apps can offer daily drawings, instant notifications of wins, and gamified savings challenges that make building an emergency fund feel like a game rather than a chore. For a generation raised on mobile games with variable reward schedules, this framing may be especially effective.

The cryptocurrency implementations point toward an even more radical future—prize-linked savings without any institution at all, just code enforcing the rules automatically. Whether this decentralized approach proves sustainable remains to be seen, but it demonstrates the concept's adaptability.

A Lottery You Can't Lose

At its core, prize-linked savings asks a simple question: what if the lottery actually helped people?

The traditional lottery extracts money from players—disproportionately from those who can least afford it—and redistributes it to state programs and a tiny number of winners. The expected value is always negative. The house always wins.

Prize-linked savings inverts this dynamic. The expected value is always positive—at minimum, you keep your principal. More likely, you earn some return. Occasionally, you win something significant. The worst case scenario is breaking even.

This might not sound revolutionary. But for millions of people who play the lottery despite knowing the odds, and who fail to save despite knowing they should, that simple inversion might make all the difference.

The human brain isn't going to change. We're going to continue overweighting small probabilities and chasing the dream of a big win. The question is whether we build systems that exploit those tendencies or harness them. Prize-linked savings offers a compelling answer: why not both?