June 1, 2018
It’s hard to jump on the gravy train when you don’t have the face value of the ticket—especially if it’s a lottery ticket. But, nonetheless, close neighbors of lottery winners in Canada tend to spend more on conspicuous purchases; to put more money into speculative investments; and to borrow more—eventually declaring bankruptcy, Bloomberg reports.
“The larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood,” says a May 2018 working paper from the Federal Reserve Bank of Philadelphia—co-authored by Sumit Agarwal of Georgetown University, Vyacheslav Mikhed of the Philadelphia Fed, and Barry Scholnick of the University of Alberta.”
An earlier version of their paper got a scads of publicity in 2016, Bloomberg says, by presenting evidence from bankruptcy filings that neighbors were trying to keep up with the lottery winner in their midst. The telltale sign: They raised spending on things their neighbors could see, such as cars, but not on indoor items like furniture.
In the latest version of their paper, the researchers focused on small lottery winnings, ranging from C$1,000 to C$150,000 (roughly US$800 to US$120,000). One reason: The winners of bigger jackpots tended to move out of their current neighborhoods.
The winners of these smaller prizes were more likely to keep their good luck a secret. The researchers theorized that people might not amp up their own spending so much if they knew that a lottery prize was the reason for their neighbor’s sudden prosperity—and they could not compare their own good fortunes to those of the winners.
The economists collected data on 7,337 lottery prizes, dating from 2004 to 2014. They then looked at spending by neighbors within areas that share six-digit postal codes, which have a median of just 13 households.
They found that a prize equal to the median annual income (C$29,000 or US$22,368)) tended to raise the bankruptcy rate of the neighbors by 6.6%.
Finally, the researchers offered one reassuring finding: There was no evidence that the people who filed for bankruptcy had been superstitiously buying more lottery tickets in hopes that their neighbor’s good luck would rub off on them.
Research contact: @petercoy