Financial Consequences of Winning the Lottery

For individuals and families facing financial ruin one would assume that a lottery win would be a perfect, if lucky, way out of hardship. Contrary to this, however, an analysis of a small, unique set of peopleā€”Floridian lottery winners linked to bankruptcy recordsā€”finds thatĀ lottery winners are more likely to claim bankruptcy than others who were in a similar financial state previous to their win (pdf).

A fundamental question faced by policymakers is how best to help individuals who are in financial trouble. This paper examines the consequences of the most basic approach: giving people large cash transfers. To determine whether this prevents or merely postpones bankruptcy, we exploit a unique dataset of Florida Lottery winners linked to bankruptcy records. Results show that although recipients of $50,000 to $150,000 are 50 percent less likely to file for bankruptcy in the two years after winning relative to small winners, they are equally more likely to file three to five years afterward. Furthermore, bankruptcy filings indicate that even though the median winner of a large cash prize could have paid off all of his unsecured debt or increased equity in new or existing assets, she chose not to do either. Consequently, although we cannot be sure other recipients of financial assistance would react in the same way lottery players did, our results do suggest that some skepticism regarding the long-term effect of cash transfers may be warranted.

via The Undercover Economist



2 responses to “Financial Consequences of Winning the Lottery”

  1. LL

    It seems that in any event, bankruptcy is extremely unlikely (1 per 1,000) and the size of the winnings shifts this probability only slightly.

    While it’s nice to believe that lottery winners are destined for a financial rollercoaster ride, the sad truth is that people who have the poor financial sense to gamble in the first place are those least able to make wise decisions about money.

  2. Indeed. As Tim Harford of The Financial Times said,

    [These findings are] not surprising, since many of them donā€™t win much, and lottery enthusiasts tend to be poor.

    You can easily extrapolate this further to say that they have little ‘financial know-how’ and thus, as you say, are “least able to make wise decisions about money”.

    The fact that the lottery is so widely played here in the UK is a fact that saddens me.