Saving whilst Gambling: An Empirical Analysis of UK Premium Bonds

Tufano, Peter (2008) Saving whilst Gambling: An Empirical Analysis of UK Premium Bonds. American Economic Review, 98 (2). pp. 321-326.


For over three centuries and across the globe, lottery-linked savings (LLS) programs have offered individuals the opportunity to save, and in lieu of paying traditional interest, have given savers periodic chances to win money or prizes. Despite their long history, LLS programs are relatively unstudied by scholars. In this paper, I detail an LLS program that the UK government has offered continuously since 1956, the UK Premium Bond (PB) program. PBs guarantee holders risk-free return of nominal principal. In aggregate, they pay a market-related return, distributed to holders each month by a lottery like mechanism.
Premium bonds are popular savings vehicles in the UK. Over £31.1 billion of PBs were outstanding as of March 2006, and public reports suggest that they were held by between 22 percent and 40 percent of UK citizens. The 60.2 million residents of the UK had £517 invested in PBs per capita. If held in the banking sector, PB holdings would have accounted for 3.9 percent of household sterling deposits in UK financial institutions.
LLS programs, such as PBs, are fascinating not just because of their size, but because of their appeal to nonsavers, especially low-income families. Mauro Guillén and Adrian Tschoegl (2002, reviewing LLS programs in Latin America, concluded: “The bankers we spoke with believe that [LLS] are especially successful with low income depositors, and in cases where there are lots of people outside the banking system.” In South Africa, a new LLS program raised over 1.2 billion rand and enrolled 750,000 participants across a wide spectrum of the economy in two years. In the United Kingdom, while PBs are held by about the same fraction of the population holding stocks, PBs have a stronger appeal to lower-income British households. PBs are held by a larger fraction of British households than are stocks and shares for all households, except those earning over £52,000 annually (Department for Work and Pensions 2007).
Are PB holders saving, gambling, or engaging in both activities? This question is not just academic, because national laws and regulations in many countries bar private LLS programs on the basis that they are prohibited gambling activities. For example, in South Africa, the government has tried to shut down the popular LLS program mentioned above; in the United States, these programs would violate state lottery laws and federal banking regulations. In this paper, I analyze the time series of net sales of the PB program and conclude that the program appears to be a hybrid of gambling and savings, but with a clear savings element.

Item Type: Article
Keywords: personal finance, finance
Subject(s): Finance
Date Deposited: 29 Aug 2012 15:31
Last Modified: 18 Sep 2018 15:49
Funders: N/A

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