This is a guest post by Roshawn Watson of Watson Inc. If you like what you see here, be sure to download his free e-book “Your Foundation to Wealth” by signing up to receive free updates from his site via e-mail (no spam). You might also be interested in subscribing to his RSS feed or connecting with him on Twitter.
Some people are consumed with the idea of winning the lottery. While it is certainly easy to understand why this is so appealing, most of us know that we’d have a better chance of getting hit by lightning. Twice. Don’t believe me? Try this “Incredibly Depressing Mega Millions Lottery Simulator.”
But some people do defy the odds and actual win. What happens to them>? Their lives are certainly changed, but does their fairy tale have a happy ending?
It just evaporated…
Most of us have heard the stories of how lottery winners often wind up with nothing, regardless of how much they won. While it is certainly counterintuitive that one’s financial position would not be improved by receiving a tens of thousands of dollars (or more), it nevertheless still happens. A recent study has investigated this popular, but largely anecdotal, belief. The findings are quite fascinating.
This study included 35, 000 people who won between $600 and $150, 000 in Florida’s Fantasy 5 lottery game between April 1993 and November 2002. Winners who received $50, 000 to $150, 000 were compared to those who won less than $10, 000. The study found that the size of the jackpot had no effect on the likelihood of declaring bankruptcy regardless.
People who won $150, 000 were just as likely to go bankrupt in the next five years as those who won less than $10, 000. Instead of changing the overall incidence of bankruptcy, the larger winnings merely delayed the filings. In other words, while the smaller winners were more likely to file for bankruptcy during the first two years after winning, this trend completely reversed during years three to five.
It is equally interesting that the size of the winnings did not meaningfully impact the net assets of the winners at the time of their bankruptcy filings. For example, people who won between $25, 000 to $150, 000 only had $8, 000 net assets more than those who won less than $1, 500. This means that, even with a median jackpot size of $65, 000, the big lottery winners had virtually nothing to show for it.
The money didn’t alter their financial destiny. Instead, it just evaporated.
Identifying the root cause
Data like these are particularly troubling because they highlight the difficulties of merely throwing money at a problem. Presumably, winning a sizable jackpot should have given many of the large lottery winners a fresh start. Instead of capitalizing on this very rare opportunity, however, many squandered it.
Here are some possible causes:
- The found money phenomenon – Some attribute this to the “found money phenomenon.” In other words, people don’t place as high of a value on inherited or found money as they would if they had to earn it themselves. This is a form of mental accounting, a theory often based on subjective and irrational criteria that determine how we save and spend our money.
- Lack of financial literacy – Another possible culprit is a lack of financial literacy. Having money doesn’t change what you know, so the large winners were just as susceptible to bad money decisions as the smaller winners. Their larger winnings just made them less vulnerable initially. This is why mental leverage is often greater than having only financial leverage.
- Poor money management habits – Old habits are hard to break. If you are a habitual hyper-consumer, it would be very hard to resist the temptation of reckless spending, especially if you’ve just won the lottery. Additionally, knowing that you are overspending doesn’t necessarily birth fiscal conservatism.
- Poor financial context – I suspect that many of these winners lacked the context necessary to deal with their new jackpots. One’s financial context determines what they will strive for and ultimately achieve. Winning a sizable sum of money doesn’t correct one’s contextual deficits.
- Overconfidence – Many psychology studies have demonstrated that most people believe that they are above average. We typically believe that we are smarter or more skillful in a certain area than “average” people. I would also imagine that it’s hard not to feel confident (or at least lucky) after winning the lottery.
These results are quite enlightening. For many, the data suggest that even receiving a large financial windfall will not have a meaningful impact on their financial destinies. The gift only appears to delay their inevitable financial ruin rather than preventing it.
These data also challenge the notion that a lack of money is the primary problem for many people. In fact, for many of the bankrupted lottery winners, the lack of money appears to have been only a symptom of problematic money practices. The fact that these individuals were even playing the lottery in the first place suggests that their net worth may never have been a primary concern.
Most importantly, these data indirectly suggest that we too should evaluate our financial blueprints. A defective money script can clearly be disastrous and often goes unnoticed because the damage is gradual.
We have a psychological connection to money as well as an external connection (i.e., money management skills as well as other head knowledge). It’s this behavioral and emotional connection with money that plays into the aforementioned mental accounting and overconfidence; these internal relationships with money have the biggest implications to us non-lottery winners.
The psychological aspects of money management may also lead us to discount the advice of skillful advisors, never consult expert opinion, invest large sums into things we know little about, get into debt, haphazardly start a business, etc.
Any of the above can be deleterious to our wealth, and can easily go unaddressed. It is quite challenging to prosper long-term while being internally bankrupt because our inner blueprints will continue directing us towards poverty and a lack of resources.
In aggregate, lasting financial change requires dealing with the underlying causes of our dysfunction instead of a myopic focus on our lack of money. It is important to keep in mind that sustainable enrichment is more than a dollars and cents issue.