How Money Messes With Our Minds

The Trick: We can't tell how long that long shot really is

From a financial perspective, playing the lottery is a bad bet. But millions of us do it anyway, even though we usually lose money. This is the flip side of the loss-aversion principle: The lure of a huge payoff overcomes our resistance to drop a few bucks on a ( probably) worthless ticket. As economists put it, we "overweight low probabilities." That's also why we buy insurance for things like flight accidents, even though the average American's annual risk of dying in a commercial-airline crash is about one in 11 million.

The Fix: Our brains aren't really wired to intuitively grasp the insignificance of very small odds. But there are ways to turn the urge to gamble on long shots to our advantage.

Harvard Business School economist Peter Tufano recently studied a savings plan called Prize-Linked Savings (PLS), which uses a lottery to encourage people to save money. Here's how it works: Credit-union members open savings accounts that pay less interest than normal accounts, but each time members make a deposit, they are enrolled in a lottery where they stand a small chance of winning a much larger sum. And, unlike in a conventional lottery, they never lose money. A group of Michigan credit unions started a PLS program called Save to Win in 2009, but other states currently don't allow PLS-type plans, which are seen as competitors to existing state-run lotteries.

Next: Trick 4 - Instant gratification