In a laboratory setting, the authors seek to determine the extent to which Prize-Linked Savings (PLS) products successfully elicit new savings (as opposed to merely displacing existing savings). The actions of the subjects in the study appear to demonstrate greater patience when future payouts are in the form of a risky gamble rather than a sure thing. This effect appears to be greatest among men, lottery players, and those with low balances in existing bank accounts.

Although PLS-based products have existed for hundreds of years and are now commonly offered by banks in Latin America, PLS products are new to the United States. Real-world evidence has demonstrated the popularity of PLS products, but this study is the first to demonstrate (in a laboratory setting) that PLS products may generate new savings. The authors acknowledge that real-world testing is needed to verify this result. In addition, they discuss several implications of their findings regarding PLS products that are likely to be of particular interest to practitioners.

First, part of the appeal of PLS products, in stark contrast to expected utility theory, is based on the extent to which consumers misestimate the probability of future uncertain payoffs. The question for practitioners is whether PLS-based products can retain their popularity over time if consumers learn to adjust their probability weightings based on their experiences. Alternatively, the authors offer the possibility that PLS-based products can retain their appeal over time as a result of their entertainment value alone. Although these are all topics for future research, PLS-based products hold enormous potential for practitioners who are seeking to design new savings products that may have the capability of raising savings rates for individuals.

The authors conducted their study on 96 undergraduate students at the University of Maryland Experimental Economics Lab. The students were offered 100 binary choices intended to determine risk and time preferences. After establishing time preferences, the subjects were asked their preference for a guaranteed interest payment to be received early versus another more deferred payment composed of two possibilities: an amount equal to the earlier payment or a small chance at a larger, lottery-like amount. The subjects were also presented with risk decision problems. The purpose of these questions was to isolate risk preferences from discount rate–driven behavior.

There are a number of reasons to maintain a degree of skepticism regarding the results of this research. The research was conducted in an artificial setting on a non-randomly chosen segment of the population. Accordingly, the results may not hold in the marketplace. And even if PLS-based products enjoy initial real-world success, no evidence is presented implying that such success will persist over time. Still, this research indicates that PLS-based products present an intriguing possibility for increasing new savings. This research should encourage practitioners to experiment with savings products that incorporate PLS-based design features.