Tuesday, July 21, 2009

Prize Bonds: You can Never lose

Most people who grew up in Ireland will remember this slogan or something very similar. The An Post prize bonds are a favourite for many people distrustful of anything that involves downside risk. The case for buying Prize Bonds is made here.

My favourite example from the website is the paragraph below.

"Prize Bonds are a flexible, secure, state guaranteed investment. You have the opportunity to win a Jackpot prize of €1,000,000 on the last Friday of every month. With a minimum purchase of €25, that's a huge return on your investment."

A version of prize-bonds seems to have captured attention on the Nudge blog and even the Wall Street Journal. "

7 comments:

Kevin Denny said...

Ah,that takes me back. But what is the state doing blatantly telling lies by saying "that's a huge return on your investment". By "you never lose" they mean "you almost always lose" .

Liam Delaney said...

the "never lose" kevin refers to the fact that you keep the stake always.

Kevin Denny said...

But the expected return is negative so I think "almost always lose" is more honest but I guess thats not the issue

pohanginapete said...

This seems like the same sort of scheme as New Zealand's "Bonus Bonds". However, the expected return (in the true sense) for Bonus Bonds is (apparently) about 3.4% tax free. After allowing for inflation, that would still mean a small positive return. Here in NZ, financial advisors generally suggest one's money is better placed elsewhere; however, Bonus Bonds are still well subscribed. Seems like a good example of behavioural economics in action?

I'd guess this closely resembles the situation for Prize Bonds in Ireland.

Liam Delaney said...

Yes, I would caution against Kevin's full cynicism unless we know the expected return. If anyone knows and would like to demonstrate that Kevin is being an old cynic in assuming that the return is low then feel free to enlighten us.

Even the fact that the expected return in New Zealand is lower than other financial instruments is not necessarily at odds with rational choice on behalf of the consumer if they are rationally gaining from other elements of the bonds including anticipation of the draw and so on.

brutontom said...

I was just trying to assess the value in prizebonds. Most people have a few squirrelled away.
According to prizebonds.ie, 3% of the prize fund is given away every year, but what does this mean at individual level?
Again in the FAQ they say if you have €1,000 on deposit, the odds are 4.5 to 1 that you will win a prize in any year.
There are 182,800 prizes every year, and 182,000 of these are €75 prizes.
To me this says the odds are you will get a cheque for €75 every 4.5 years from your €1,000. This represents a tax-free return of 1.6% per annum, without considering inflation or deflation. And your capital is guaranteed.

Anonymous said...

Buying Prize Bonds is more like playing the lottery than investing. It is more efficient and cheaper than playing the lottery.