Welcome Guest
Log In | Register )
You last visited December 2, 2016, 5:18 pm
All times shown are
Eastern Time (GMT-5:00)

Why you might go bankrupt if your next-door neighbor wins the lottery

Insider BuzzInsider Buzz: Why you might go bankrupt if your next-door neighbor wins the lottery
51
Rating:

Winning the lottery can be hazardous to your neighbors' financial health.

Research released this month by the Federal Reserve Bank of Philadelphia found a significant jump in bankruptcies among households living near someone who won a big lottery jackpot. The economists theorized that people may have seen the good fortune next door and felt pressure to accumulate more assets of their own, especially flashy purchases like cars, that they simply could not afford.

"Income inequality induces poorer neighbors to consume more visible (rather than invisible) commodities to signal their abilities to 'keep up with the Joneses' to their richer neighbors," economists Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnickwrote. "This tendency can lead to additional and unsustainable borrowing among the relatively poor to finance this additional conspicuous consumption, which can eventually result in financial distress and bankruptcy."

Mr. Agarwal is a professor at the National University of Singapore, Mr. Mikhed works at the Philadelphia Fed's Payment Cards Center and Mr. Scholnick is a professor at the University of Alberta. Their research was circulated in a Philadelphia Fed working paper and relies on administrative data from an unnamed Canadian province. They analyzed lottery prizes and bankruptcy filings over 10 years, sorted down to six-digit postal codes that on average contained only 13 households, revealing financial ripple effects on a lottery winner's closest neighbors. They limited their analysis to neighborhoods with a single lottery win and excluded cases when lottery winners themselves filed for bankruptcy. They also omitted fixed-payout lottery prizes and very large jackpots.

The headline finding: For every $1,000 increase in the lottery prize, there was a 2.4% increase in bankruptcy filings by the winner's neighbors over the next few years. "These results are more pronounced for low-income neighborhoods and high income-inequality areas," they wrote.

Why would someone winning the jackpot cause someone living down the street to go bankrupt a year or two later? The economists argued that people who feel they are poorer than their peers may spend more in a conspicuous fashion, financing their purchases with debt. But that debt will need to be repaid, potentially leading to financial difficulties and even bankruptcy.

Messrs. Agarwal, Mikhed and Scholnick analyzed the Canadian bankruptcy data and found "evidence that those who filed for bankruptcy after a larger lottery win of a close neighbor have significantly larger holdings of visible assets (e.g., cars, motorcycles, houses) relative to the holdings of these same visible assets by those who filed for bankruptcy after smaller lottery wins of a close neighbor," they wrote. There was no similar difference for "invisible assets" like cash or pensions, they said.

In other words, when someone wins a big lottery prize, neighbors appear more likely to buy cars and remodel their houses to show that they can keep up — and go broke in the process.

By demonstrating what the economists described as "causal evidence on the link between income inequality and financial distress," their paper adds to the growing use of data on lottery winners to examine the economic and social effects of sudden income windfalls.

WSJ

We'd love to see your comments here!  Register for a FREE membership — it takes just a few moments — and you'll be able to post comments here and on any of our forums. If you're already a member, you can Log In to post a comment.

39 comments. Last comment 9 months ago by KY Floyd.
Page 1 of 3
TheMeatman2005's avatar - lightening
Brooklyn, NY
United States
Member #169723
October 29, 2015
875 Posts
Offline
Posted: February 16, 2016, 10:21 am - IP Logged

Don't most lottery winners move to a more affluent neighborhood after winning?

I don't think I would be living in my current residence after I win a significant prize amount.

The Meatman

“The quickest way to double your money is to fold it in half and put it in your back pocket.” Will Rogers

Winning happens in a flash, Like A Bolt Of Lightning!  Patriot

    gocart1's avatar - lighthouse
    ONEONTA,NEW YORK
    United States
    Member #30516
    January 17, 2006
    419 Posts
    Offline
    Posted: February 16, 2016, 10:30 am - IP Logged

    Don't most lottery winners move to a more affluent neighborhood after winning?

    I don't think I would be living in my current residence after I win a significant prize amount.

    I Agree! YES ....I WOULD MOVE IN A HEARTBEAT ..ALL THE PEOPLE LOOKING FOR A HANDOUT  , WOULD MAKE ME GO UNDERGROUND SOMEWHERE.PartyUS FlagParty

      HoLeeKau's avatar - YheaShea
      Idaho
      United States
      Member #94283
      July 17, 2010
      2284 Posts
      Offline
      Posted: February 16, 2016, 10:31 am - IP Logged

      That's what I was wondering too.  Did they analyze the neighborhood the winner was in when they won, even if they moved?  Or just the neighborhood they moved to?

        tnlottodreamer's avatar - animal bear.jpg
        The Great Smoky Mountains
        United States
        Member #59921
        March 31, 2008
        266 Posts
        Offline
        Posted: February 16, 2016, 11:16 am - IP Logged

        Why do people think they have keep up with their neighbors for? I don't keep up with no one. I buy and do what I want and can careless what the neighbors buy or do.

        I Agree!*** You Can't Win, If You Don't Enter***

          music*'s avatar - nw bookeep.jpg
          Happy California
          United States
          Member #157856
          August 2, 2014
          1503 Posts
          Offline
          Posted: February 16, 2016, 11:17 am - IP Logged

           I purchased a new $14,000.00 car in 2006 and a neighbor bought the same make and model. I did not feel good about that. This happened in a low-income apartment complex.

           I would move before making any big purchases after I win big.

          Hiding Behind Computer

           I've been rich and I've been poor. Believe me, rich is better. 

           Attributed to Joe E. Lewis and others

            RJOh's avatar - chipmunk
            mid-Ohio
            United States
            Member #9
            March 24, 2001
            19815 Posts
            Offline
            Posted: February 16, 2016, 11:22 am - IP Logged

            Sometimes lottery winners go bankrupt too acting as rich as others think they are or should be.

             * you don't need to buy more tickets, just buy a winning ticket * 
               
                         Evil Looking       

              Avatar

              United States
              Member #122691
              February 6, 2012
              330 Posts
              Offline
              Posted: February 16, 2016, 11:29 am - IP Logged

              Don't most lottery winners move to a more affluent neighborhood after winning?

              I don't think I would be living in my current residence after I win a significant prize amount.

              Depending on the part of the country and the amount you win you could move to the most affluent neighborhood in the area and still be vastly wealthier than anyone else. I know a billionaire that lives in a $1.6 million house and the most expensive home in the area is maybe $2 million, maybe a little more so he's right up there without barely having to spend any of his money. He could build a $10 million castle out there easily but then he would never ever be able to sell it. So if you won $50 million and bought a $2 million house in a neighborhood with a bunch of guys making $500,000 or so, you could easily drive some of them towards bankruptcy having them try to compete with what you can buy, especially when their wives get involved. 

                luckyshoes's avatar - butterfly neg.jpg
                Pennsylvania
                United States
                Member #79502
                September 2, 2009
                6389 Posts
                Online
                Posted: February 16, 2016, 11:44 am - IP Logged

                Don't try to keep up with the Jones.....Crazy

                Success isn't in Having money...it's in Handling it

                  Avatar
                  New Member
                  Toronto
                  Canada
                  Member #170682
                  December 12, 2015
                  31 Posts
                  Offline
                  Posted: February 16, 2016, 11:57 am - IP Logged

                  And why should I listen to research by the Fed anyway? It's a corrupt organization that has actively worked to devalue the purchasing power of my currency.

                    tnlottodreamer's avatar - animal bear.jpg
                    The Great Smoky Mountains
                    United States
                    Member #59921
                    March 31, 2008
                    266 Posts
                    Offline
                    Posted: February 16, 2016, 12:12 pm - IP Logged

                    A few years ago a friend and I pretended we won $50.000 on a two dollar JUMBO buck scratch off. We changed the 13 to a 18. We went up to the lottery district office and we did a selfie of us holding the ticket. We then posted the video on Facebook and we were yelling and screaming woohoo we won. Well I had 2 people call me and at least 5 or 6 people send me a message begging me for money. I told them it was just a joke well im sure that embrassed the heck out of them. It was really funny and I still have the video of it...it's priceless.

                    I Agree!*** You Can't Win, If You Don't Enter***

                      HoLeeKau's avatar - YheaShea
                      Idaho
                      United States
                      Member #94283
                      July 17, 2010
                      2284 Posts
                      Offline
                      Posted: February 16, 2016, 12:35 pm - IP Logged

                      A few years ago a friend and I pretended we won $50.000 on a two dollar JUMBO buck scratch off. We changed the 13 to a 18. We went up to the lottery district office and we did a selfie of us holding the ticket. We then posted the video on Facebook and we were yelling and screaming woohoo we won. Well I had 2 people call me and at least 5 or 6 people send me a message begging me for money. I told them it was just a joke well im sure that embrassed the heck out of them. It was really funny and I still have the video of it...it's priceless.

                      That's hilarious!  Imagine the phone ringing off the wall if you had won $50 million!

                        Avatar

                        United States
                        Member #122691
                        February 6, 2012
                        330 Posts
                        Offline
                        Posted: February 16, 2016, 12:49 pm - IP Logged

                        A few years ago a friend and I pretended we won $50.000 on a two dollar JUMBO buck scratch off. We changed the 13 to a 18. We went up to the lottery district office and we did a selfie of us holding the ticket. We then posted the video on Facebook and we were yelling and screaming woohoo we won. Well I had 2 people call me and at least 5 or 6 people send me a message begging me for money. I told them it was just a joke well im sure that embrassed the heck out of them. It was really funny and I still have the video of it...it's priceless.

                        Ha Ha, that's great. LOL Thumbs Up

                          Groppo's avatar - cat anm.gif

                          United States
                          Member #162631
                          January 7, 2015
                          502 Posts
                          Offline
                          Posted: February 16, 2016, 12:54 pm - IP Logged

                          Don't most lottery winners move to a more affluent neighborhood after winning?

                          I don't think I would be living in my current residence after I win a significant prize amount.

                          Yeah, no way would I stay.

                          I would certainly move, as my n/hood is not what it was 40 years ago.
                          And, if winning the lotto did happen to me, I wouldn't want people to play
                          "Keeping up with the Jones's", and cause them "undue" financial stress. 

                          • Don't chase the numbers you play.
                          • Play only numbers you've already played, plus however many random picks.
                          • But, ALWAYS the regular numbers you play.  This will make you a winner, not a chaser.
                                    (so far, though, I've yet to win any significant lotto prize)
                            Groppo's avatar - cat anm.gif

                            United States
                            Member #162631
                            January 7, 2015
                            502 Posts
                            Offline
                            Posted: February 16, 2016, 12:56 pm - IP Logged

                            And why should I listen to research by the Fed anyway? It's a corrupt organization that has actively worked to devalue the purchasing power of my currency.

                            Bingo.

                            • Don't chase the numbers you play.
                            • Play only numbers you've already played, plus however many random picks.
                            • But, ALWAYS the regular numbers you play.  This will make you a winner, not a chaser.
                                      (so far, though, I've yet to win any significant lotto prize)