The Mega Millions jackpot has hit $640 million, sending lots of people to convenience stores for the inconceivably remote odds of instantly becoming richer than Mitt Romney. It's not a good risk for people—and around the country it hasn't been the windfall for schools that it's often promised as. But set aside reality for a minute and assume you win. Is it still a good thing?
I'm reminded of this because of a 2007 Chicago article by David Bernstein, "The 18-Million-Dollar Headache," about a 63-year-old Lithuanian immigrant and semiretired truck mechanic who won what was, at the time, the second-biggest payout for a sole ticket-holder in Illinois Lottery history. What followed was exactly what you've heard anecdotally over the years: financial and familial collapse, and untold misery. This, in particular was crushingly sad:
Also part of the bad: the jackpot led the family to abandon its roots, to mixed results. Newly millionaires, the Snelius clan moved from Burbank, where they had lived for 40 years, to Palos Heights, a place where they imagined rich people are supposed to live. But Snelius says they got treated by their well-off neighbors as if they were the Clampetts of the TV sitcom The Beverly Hillbillies—a blue-collar family that moved into a blue-blood neighborhood. Tom Sanocki, his son-in-law, says that the community regarded them merely as “the Lottery Winners,” even though many of the neighbors, like the Sneliuses, are nouveaux riches. “[Alex Snelius] worked his ass off—harder than anybody in this subdivision—I guarantee it,” says Tom.
Alex Snelius's financial windfall and its aftermath fell within well-known psychological theories, as Bernstein found:
Psychologists who have studied the effects of wealth on behavior have found, generally speaking, that money and happiness do not go hand in hand. This is especially true, they say, for people who become overnight millionaires—a phenomenon that the psychotherapist Joan Indursky DiFuria and the psychologist Stephen Goldbart call “sudden-wealth syndrome,” or as others have termed it, “affluenza.”
Another oft-cited study even claimed that lottery winners were no happier than paralyzed accident victims—a sign, say researchers, that people usually adapt to whatever comes along, good or bad.
And DiFuria says the effects of life-altering amounts of wealth often bring dread: “There’s a sense of not knowing what to do—‘What do I do with all this money?’ For some, it’s a sense of embarrassment, or guilt. For others, it’s ‘What will other people think of me?’ There’s also a sense of ‘Who do I trust?’”
This did make me wonder if there's an experiential component to wealth inequality: if being born into, or growing up around, substantial wealth makes a person more comfortable with wealth, and thus more likely to maintain it for future generations. One econ blogger I read had an interesting idea for athletes, whose post-career economic problems are familiar, such as in the case of Dennis Rodman: contracts should come with an annuity component.
I were a professional sports agent with a sense of responsibility for young (they're all young at some point) athletes about to get temporarily rich, I'd have a chunk of their salary paid as an annuity they start drawing on at age 40 or so. If I ran the sports leagues I'd make such things standard.
Not sure if that would make it through labor negotiations, but it's an interesting idea.
But that's a road for another time; I was curious if lottery winners specifically lost their money or happiness faster than those of us who are less lucky.
That study about how "lottery winners were no happier than paralyzed accident victims," "Lottery Winners and Accident Victims: Is Happiness Relative?," was co-written by two then-Northwestern psychologists. Their thesis was that something as mindblowingly awesome (my phrasing, not theirs) as winning the lottery would make things that are less mindblowingly awesome seem disappointing by comparison.
For a measure of everyday pleasure, respondents were asked to rate how pleasant they found each of seven activities or events: talking with a friend, watching television, eating breakfast, hearing a funny joke, getting a compliment, reading a magazine, and buying clothes.
So, basically, if we're going to save the magazine industry, we need to ban seat belts? Not exactly:
As the table shows, winners rated the seven ordinary activities as less pleasurable than controls did, and this difference is significant…. Accident victims also tended to find the everyday events less enjoyable than controls, but the difference is not quite significant….
Accident victims were "happy" about the past (read: nostalgic), unhappy about the present, and happy (read: optimistic) about the future. Lottery winners were "not significantly different in their ratings of how happy they were now, how happy they were before winning (or, for controls, how happy they were 6 months ago), and how happy they expected to be in a couple of years."
What's interesting about the study is that its authors reject the Biggie Smalls theory of unhappiness among the newly rich. They found that winners actually had fewer problems:
But the winners in our study did not appear to find their good fortune problematic. They rated winning very high in relation to the best thing that could possibly happen to them. They typically listed positive life changes as resulting from the windfall, such as decreased worries and increased leisure time. This suggests that winning lessened the stress and strain of their lives.
So it's not more money, more problems; it's more money, fewer simple pleasures, which cancels out the lack of stress.
But what about just going broke? That's another accepted piece of folk wisdom: that lottery winners have a tendency to go bust quickly, or have other horrible ills occur. But those things also happen to poor people too; selection bias is a concern since lottery winners are relatively high-profile. Anyway, according to one recent study of Florida lotto winners (in the comparatively modest range of $50k-$150k), lotto winners are less likely to go bankrupt in the short term, but no less likely to thereafter:
The results indicate that giving $50,000 to $150,000 to people only postpones bankruptcy. Specifically, while these recipients are 50 percent less likely than small winners to file for bankruptcy immediately after winning, they are equally more likely to file for bankruptcy three to five years after winning. Furthermore, bankruptcy petitions filed in the 5 years after winning reveal that the net assets and unsecured debt of large winners are no different from those of small winners. This implies that even though the median winner of a large cash prize could have paid off all of his unsecured debt or increased equity in new or existing assets, he did neither.
This study seems to be frequently misread (you're not more likely to go bankrupt); the gist is that winning a substantial if not world-beating sum doesn't make you any better with finances, but it does give you a cushion for a bit.
One piece of advice economics has to offer us about winning the lottery? Keep the news to yourself. Alex Snelius got famous, and as David Bernstein detailed, got hit up for money hither and yon. There's an alternative:
I run two lotteries in 158 agriculture clubs in central Malawi. One lottery, and its winner, is publicly announced to the whole group. The other lottery is private, and only its winner knows that a second lottery was held. This experimental variation in information about cash assets allows me to distinguish between the private, ﬁrst-best use of unexpected income, and the second-best use of such income when constrained by obligations to other members of the community. If public knowledge about income does not constrain its use, then spending patterns will be the same for winners of the public and private lotteries. On the other hand, if public winners face a diﬀerent budget constraint than private winners, they will spend their prize more quickly in order to evade the obligation to share their income. Indeed, I ﬁnd that those who receive money under the public condition spend 35 percent more windfall income within the ﬁrst week of receiving it than those who receive money under the private condition.
The theory behind it is actually pretty interesting, and might go some way towards explaining why lottery winners are spendthrifts, beyond mere irresponsibility:
Social anthropologists explain that the pressure to share cash with family or neighbors is pervasive, and that people respond to these pressures strategically, including by spending income quickly: “Consequently, on those infrequent occasions when they were able to earn money, they often made wasteful or ill-considered expenditures just to keep friends from borrowing it.”
The author (Jessica Goldberg of the University of Maryland) is specifically looking at Malawi: "Individuals in poor agrarian economies sometimes exhibit high marginal propensities to consume that are suggestive of high discount rates." But it's a fascinating concept: the idea that social and familial pressure is the doom of the nouveau riche.
Photograph: Ecstatic Mark (CC by 2.0)