Banking on lottery tickets: A behavioural study of prize-linked savings

Abstract

Research has identified lower income Canadians who could improve their welfare if availed consumption smoothing through income rationing or savings. Likely, some such individuals struggle to save because their preferences are not well represented by expected utility theory, including those exhibiting hyperbolic discounting. Prize-linked savings (PLS) programs like Britain’s Premium Bond offer principal protection with the chance of winning monetary prizes. They have demonstrated success in creating new savers, but Canadian versions are only sparsely available through NGOs. I test individual risk preferences in a portfolio building laboratory experiment, and find individuals primed to perceive their income as low take significantly more risk. Further, these individuals significantly reduce risk when presented a PLS option. I posit this behaviour can be explained by social preferences like the inequity aversion described by Fehr and Schmidt (1999), and find their model significantly outperforms the classical model in predicting behaviour in this experiment.