The effects of winning the lottery

[Loren Pechtel]

I've previously mentioned the fact that lottery winners often go bankrupt but now I found a new one: Lottery winner neighbors are more likely to go bankrupt. Apparently a case of keeping up with the Joneses.

http://time.com/money/4503078/powerball-jackpot-lottery-winner-neighbors-bankrupt/

 

[skepticalbip]

I am a bit dubious of their conclusions. From the quote below, someone should have a 120% chance of bankruptcy if their neighbor wins $50,000 in a lottery.

From the article

The study focused on lottery winners in Canada, and found that every $1,000 increase in lottery winnings raises the risk of bankruptcy among the neighbors by roughly 2.4 percent.

 

[Loren Pechtel]

I am a bit dubious of their conclusions. From the quote below, someone should have a 120% chance of bankruptcy if their neighbor wins $50,000 in a lottery.

From the article

The study focused on lottery winners in Canada, and found that every $1,000 increase in lottery winnings raises the risk of bankruptcy among the neighbors by roughly 2.4 percent.

2.4% increase in the rate, not the rate went up by 2.4%.

 

[barbos]

I am a bit dubious of their conclusions. From the quote below, someone should have a 120% chance of bankruptcy if their neighbor wins $50,000 in a lottery.

From the article

The study focused on lottery winners in Canada, and found that every $1,000 increase in lottery winnings raises the risk of bankruptcy among the neighbors by roughly 2.4 percent.

It's relative increase, not absolute.

 

[Crowcause]

Seems odd as I would think that most would either-
A. Be wealthy enough already when they won that they would already live in a really nice house with good security in a nice neighborhood, in which case the neighbors wouldn't likely need to go in debt so much to keep up OR,
B. Be living in a poor, middle class, or even some upper middle class neighborhoods and use part of their winnings to sell their house and move up to a nicer neighborhood. How many would win big and stay in their same place? Generally, the more you have, the more security you need, and that is usually reflected by the average wealth of the surrounding population.

 

[Derec]

I am a bit dubious of their conclusions. From the quote below, someone should have a 120% chance of bankruptcy if their neighbor wins $50,000 in a lottery.

It's relative increase, not absolute.

That's possible.
What I think is happening though is that this is a study of small winnings, a up to 10 or 20 thousand CAD, where such simple relationships between winnings and chance of bankruptcy might hold.
That would also explain why they do not move to a nicer neighborhood. Their winnings are enough to buy some luxuries to make their neighbors envious, but not life-changing and not enough to move to a nicer neighborhood.
Paying down their mortgage (or other debt, especially CC, if they have it) would be a much better use of that money instead of "new cars, boats, and supersized TVs". But that's not sexy.

Edited to add. The paper is available online. Don't have time to read the whole thing, but I was right that most winnings are a few thousand dollars. They go up to $150,000 in that study, which is a nice sum, but the numbers surveyed >$10k is much less than those with smaller winnings. There were especially many winners of less <$3k. Which is enough for some electronics or maybe a down payment on a reasonably priced car.

 

[Derec]

How many would win big and stay in their same place? Generally, the more you have, the more security you need, and that is usually reflected by the average wealth of the surrounding population.

You are right. Even the Clampetts moved to Beverly Hills.
But this survey focused on small winners, not those who won multimillion dollar jackpots. In fact, vast majority won less than $3k. Canadian.

 

[fast]

All lump sum takers the future bankruptees? What about those that elect to have it divied up over 20 years? Bankrupt delay?

 

[Derec]

All lump sum takers the future bankruptees? What about those that elect to have it divied up over 20 years? Bankrupt delay?

20 easy payments of

per year? Can you even take such puny sums as an annuity?

 

[TV and credit cards]

Annual payments likely have a low limit. I would think annual payouts would be for large sums. I betcha those that do take annual payments drive themselves so deep in debt in expectation of future payouts, they ultimately end up selling the annunity to a third party for that lump sum.

Paying off credit card debt in lieu of buying new toys is little more than a delay of buying those new toys with your now freshly zeroed out credit cards. Unless of course the winners magically obtain financial discipline.