Investment instruments with lottery-like qualities

Ah, the two-week gap between when this post was written and this week’s financial scariness.

The finding from our first study, that when you make people feel poor they play more, is especially sad since playing the lottery is on average a massively losing proposition. The propensity of low income individuals to play the lottery has the perverse effect of exacerbating their poverty. Although there are no easy solutions to the problem, one obvious one would be to cease marketing and advertising that targets the poor. It probably makes sense for the state to sell lottery tickets, because otherwise they will be sold by organized crime. However, does it really make sense for the state to be inducing, through advertising, poor people to play who wouldn’t play in the absence of such inducement?

Similarly, states could promote and offer more games that appeal to wealthier players, such as Powerball, and not those popular with poorer players, such as instant scratch-off tickets. Another obvious solution, though one that is even less likely to be implemented, would be for the state to increase the payout on the tickets, and perhaps to increase the number of moderate size prizes.

Finally, a third option would be for financial institutions to issue investment instruments that have lottery-like qualities (for example, offered in small amounts, available at many convenient points of purchase, provide a small chance of a large upside) but offer a positive rate of return, providing the pleasure of playing the lottery without the steep cost. In many other countries “prize bonds” or other savings instruments are available that pay lottery winnings in place of, or in addition to, regular interest. Regulations in the United States have stymied the development of such offerings.

from “Lotteries,” by Jonah Lehrer (interviewing George Loewenstein), The Frontal Cortex, 15 September 2008 :: via Ben

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