How would you feel if someone who lived right next door to you won the lottery? Happy and pleased no doubt, but also, perhaps a bit jealous – after all, the people you’ve nodded to over the fence, or shared a glass of wine and a good gossip with over the years are now considerably richer than you and able to flash the cash.
With obvious fact that the Powerball and Mega Millions jackpots are growing, it looks like millions of Americans will be buying tickets with the hopes of winning huge. If you don’t win, you might think the next best thing would be for someone in your community to hit it big.
So then you might be tempted to try and keep up with them – but you really shouldn’t. One recent study even goes as far as to prove this conclusively. Here’s why lottery wins are bad for the people next door!
Keeping Up with the Joneses
We’re all familiar with the phrase ‘keeping up with the Joneses’, and it’s something many people tell you to avoid. Never has this been truer than in Canada where it has been discovered that close neighbors of lottery winners there have ended up spending much more money on buying expensive goods and paying into speculative investments like stocks and shares. Worse than that, it seems these neighbors are much more likely than lottery winners to go bankrupt.
In 2016 a version of a paper coming from the Federal Reserve Bank of Philadelphia by Sumit Agarwal of Georgetown University and Vyacheslav Mikhed of the Philadelphia Fed, with Barry Scholnick of the University of Alberta, titled: “Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies.” caused intense interest when it presented evidence from bankruptcy filings that were mostly from neighbors who had been trying to keep up with lottery winners who lived in their vicinity. One of the key giveaways from these people was a sudden increase in spending on items that would be on the show, such as new cars, but nothing of any serious value for the interior of their homes such as gadgets or new furniture.
The paper, which has recently been revisited says: “The larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood.”
There are also some crucial new insights that co-author Mikhed explains. He says that neighbors who all filed for bankruptcy had tended to place assets in big risk investments like stocks, rather than putting them into insurance.
Mikhed states that this type of behavior is consistent with the idea that these people are trying to compete with their neighbors in trying to win a slice of the good life and make some money of their own.
It was also found that those same neighbors tended to try and borrow more money too when compared to Canadians who didn’t have lottery winners for neighbors.
More Findings from the Study
The study mainly focused on people who had won relatively small amounts, ranging from C$1,000 to C$150,000 (roughly $800 to $120,000).
The reason for focussing on smaller winners was that people who win larger jackpots will almost always tend to move out of their homes and into bigger properties.
Secondly, the people who win smaller prizes were more likely to not want to shout about how much money they’ve won. The theory here is that people might not spend so much if they knew that the reason their neighbors were lottery winners.
Canadian Lottery Study Was Large Scale
The researchers leading the study had a broad target, collecting data from 7,337 lottery prizes from an unnamed Canadian province, throughout ten years, dating from 2004 to 2014.
The research was whittled down further to only include the effects on people who shared six-digit postal codes and with a median of thirteen households.
A prize equal to the annual income of roughly C$29,000 tended to raise the bankruptcy rate of the neighbors by just under seven percent.
However, there is no evidence to suggest that anyone who filed for bankruptcy listed gambling as one of the reasons for their financial struggles. This is a signal that they were more than likely not buying extra lottery tickets in the hope that the luck of their neighbors might rub off on them
Previous research had shown neighbors of lottery winners spent more on expensive, showy items. The new study shows that some of the neighbors did cause themselves financial harm to keep up with the Joneses.
“Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors,” states the research paper results.
Why is there such a negative ripple effect? People who win the lottery tend to spend some of the money on new cars, boats, and supersized TVs.
Sumit Agarwal, a professor of finance at Georgetown University’s McDonough School of Business and an author of the study says “We are all competitive in nature. This is what marketing people rely on.”
Those living closest to the winners were the ones most likely to ramp up their spending on visible assets like cars, motorcycles, and houses, and the effect held true in both high- and low-income neighborhoods. Also, the bigger the lottery windfall, the greater the value of visible assets among neighbors who file for bankruptcy.
A Conclusion of the Findings
The larger the lottery win that one person had in a small neighborhood the more subsequent bankruptcies were likely to occur in that self-same place.
This was due, for the most part, to neighbors of lottery winners increasing their spending on items like cars, motorbikes and other flashy ephemera that could be seen by their neighbors when they were out and about.
The previous incarnation of the study found that spending did not increase on non-visible items, like furniture.
It was also noted that a sudden windfall might lead the winner to throw a party for the neighbors, indulge in expensive garden items, or splurge on other things that make the neighborhood a nicer place.
Findings from the paper also add: “We also found that borrowing in the entire neighborhood increases with lottery amounts. These findings are consistent with additional risk-taking and debt accumulation to finance conspicuous consumption leading to financial difficulties and bankruptcy for non-winning peers.”
It’s been suggested that the study might prompt further research into whether wealth disparities in wealth in the wider economy might potentially lead to the kind of financial distress that precipitates financial crises, such as in 1929 and 2008.
Bigger Lottery Wins Are Rarer
Big lottery winners are extremely rare, but hundreds of thousands of people win at small amounts on the Powerball every week. The researchers focused on winnings under $150,000.
The experiences of these players and their neighbors might indicate what happens when someone in a neighborhood wins a massive amount of money, and their friends are made aware of it.
Agarwal added that policymakers might try and take a few simple steps to help people curb the impulse to keep up with their neighbors.
As an example, he says if lottery winners are not allowed to take their winnings in a lump sum, they’re going to be less likely to engage in a series of splurges that empty their bank accounts and also tempt the neighbors into copycat behavior.
What’s especially interesting is that people’s spending habits appear to be affected by any sudden change in the financial status of the people that surround them in their neighborhood.
Agarwal also spent a lot of time researching how people adjust spending when someone living nearby declares bankruptcy, and the results were pretty much a mirror image of the lottery study.
In every single month after someone filed for bankruptcy, neighbors reduced their spending by around three percent. Neighbors most likely to be friends with the person in financial distress, those with similar incomes, education, and the like, reduced their spending even more!
It is a long-held belief that many lottery winners spend pretty much all their winnings and find themselves in financial trouble in a short period after their win. Now it also seems their neighbors might do the same too.
As with all these things, it’s always best to make your way in life and not try to copy anyone else. You don’t know the background of their circumstances or what the reasons are for a sudden increase in spending. It’s better to follow your path than covet what someone else has or try to compete with them, many people have found out the hard way and at a high cost.