If last night’s $1.6 billion Powerball winners are typical they will not return to work. There also is a good chance that each person will prefer a lump sum rather than decades of regularly scheduled checks even if it means getting $33.9 million instead of $96.6 million (chosen by a 2009 winner). Asked what they would do with the money, winners’ replies included eliminating debt, buying houses for themselves and relatives, taking a trip to Disney and buying a boat, a pick-up truck, or a hot-rod. One gentleman said he would invest in his lawn care business while another added “investing the money” to a list of purchases,.
Where are we going? To the impact of cash transfers on people with financial difficulties.
Florida Lottery Winners
For many lottery winners in a Florida study, the cash did not give them financial stability. Instead, their names were listed in the state’s bankruptcy records.
There are lots of reasons that people manage a windfall poorly. Behavioral economists say that certain individuals are unable to delay gratification, others perceive the cash as easily spent “house money,” and many of us are naive investors.
The key takeaway from the study was that the cash windfall let recipients postpone bankruptcy even when the amount was sufficiently large to have prevented it. You can see below that a statistically significant number of lottery recipients declared bankruptcy three to five years after receiving a cash prize.
Recipients of Georgia Land Grants
In another study that focused on the impact of unexpected wealth, researchers followed the descendants of individuals who got land grants from the state of Georgia. The grants were distributed through an acreage lottery in which more than 97% of the state’s eligible males participated and close to 15% won. The winners received a valuable parcel of land that they kept or sold.
Economists thought that by following the households that received the windfall through several generations, they could form conclusions about the impact of a wealth transfer on human capital, poverty and economic growth. More wealth, they hypothesized, could impact school attendance.
It did not. Similar to the Florida study, the windfall failed to change the economic trajectory of a household.
Our Bottom Line: Lottery Problems
Although lotteries can add millions to state coffers, they generate incentives that can be problematic.
With a warning that the language is occasionally racy, this John Oliver video makes us smile while describing the downside of the lottery: