Prize-linked savings mechanism in the portfolio selection framework

• Authors: Anna Kaliciak
• Languages of publication: EN

Abstracts

EN

Prize-linked savings (PLS) instruments implement the lottery-like component into the structure of traditional financial products. Following existing research based on both real and experimental data, such programs appeared highly successful in raising the overall savings rates within the given environments. PLS accounts seem to be treated by decision-makers as substitutes to ordinary lotteries, but this does not hold when comparing PLS with traditional interest-bearing savings products. This paper explains such empirical observations in a framework of portfolio selection problem. For that purpose, two models have been presented and used for deriving optimal portfolios in a presence of PLS, lottery and savings products. As shown in the analysis, the standard mean-variance model does not allow for a PLS instrument to be of optimum choice, whereas in the case of behavioural portfolio model allocating all disposable income

Keywords

EN

Prize-linked savings, mean-variance model, behavioral portfolio theory

• Publisher: Prague Development Center, Czech Republic
• Journal: Business and Economic Horizons
• Year: 2015
• Volume: 11
• Issue: 4
• Pages: 195-208

Dates

published

2016-01-19

Contributors

author

Anna Kaliciak

References

• Atalay K., Bakhtiar F., Cheung S., Slonim R., 2014. "Savings and prize-linked savings accounts", Journal of Economic Behavior and Organization, 107, pp.86-106, http://dx.doi.org/10.1016/j.jebo.2014.07.015
• Cole S.A., Iverson B.C., Tufano P., 2014. "Can gambling increase savings? Empirical evidence on prize-linked savings accounts", working paper
• Friedman M., Savage L.J., 1948. "The utility analysis of choices involving risk", Journal of Political Economy, Vol.56, pp.279-304, http://dx.doi.org/10.1086/256692
• Kahneman D., Tversky A., 1979. "Prospect theory: An analysis of decision making under risk", Econometrica, 47, pp.263-291, http://dx.doi.org/10.2307/1914185
• Kearney M.S., Tufano P., Guryan J., Hurst E., 2010. Making savers winners: An overview of prize-linked savings products", National Bureau of Economic Research, w16433 Lopes L., 1987. Between hope and fear: The psychology of risk", Advances in Experimental Social Psychology, Vol.20, pp.255-295
• Markowitz H., 1952. "Portfolio selection", Journal of Finance, Vol.7(1), pp.77-91, http://dx.doi.org/10.1111/j.1540-6261.1952.tb01525.x
• National Savings and Investments, 2015. "Annual report and accounts and product accounts 2014-15"
• Roy A.D., 1952. "Safety first and the holding of assets", Econometrica, Vol.20(3), pp.431-449, http://dx.doi.org/10.2307/1907413
• Shefrin H., Statman M., 2000. "Behavioral portfolio theory", Journal of Financial and Quantitative Analysis, Vol.35(2), pp.127-151, http://dx.doi.org/10.2307/2676187
• Von Neumann J., Morgenstern O., 1944. "Theory of games and economic behavior", Princeton University Press

Identifiers

DOI

http://dx.doi.org/10.15208/beh.2015.15