Does money help people avoid going bankrupt? You’d think so. But you’d be wrong.
This new paper studied what happened to winners of the Florida state lottery between 1993 and 2002. And it found:
This new paper studied what happened to winners of the Florida state lottery between 1993 and 2002. And it found:
Although recipients of $50,000 to $150,000 are 50 percent less likely to file for bankruptcy in the two years after winning than are recipients of less than $10,000, they experience a statistically significant increase in bankruptcy rates of similar magnitude three to five years after winning. This suggests that winning the lottery only postpones bankruptcy rather than reducing it.
Kerry Katona’s troubles are, it seems, not atypical.
This is a kick in the teeth for the notion that consumers are rational. The permanent income hypothesis predicts that the rational consumer will spend only the annuity value of a windfall*.
So why don’t people do this? It could be that lottery players are just feckless and will fritter away their fortune. Or it might be that they acquire expensive tastes which they find hard to drop when the money runs out. Or maybe they engage in mental accounting, and regard a lottery win as “fun money” rather than something with which to pay down debt.
Whatever, this is evidence for the paternalists. Which I find sad.
* Not all data on windfalls contradicts the PIH, however. This paper (pdf) shows that Czechs who received windfalls during the 1990s privatizations did behave in accordance with the PIH. Which raises the intriguing possibility that people brought up under communism act more like rational economic agents than those (such as these Floridans) raised under capitalism.
** My picture proves that smoking is not necessarily bad for your chest.
This is a kick in the teeth for the notion that consumers are rational. The permanent income hypothesis predicts that the rational consumer will spend only the annuity value of a windfall*.
So why don’t people do this? It could be that lottery players are just feckless and will fritter away their fortune. Or it might be that they acquire expensive tastes which they find hard to drop when the money runs out. Or maybe they engage in mental accounting, and regard a lottery win as “fun money” rather than something with which to pay down debt.
Whatever, this is evidence for the paternalists. Which I find sad.
* Not all data on windfalls contradicts the PIH, however. This paper (pdf) shows that Czechs who received windfalls during the 1990s privatizations did behave in accordance with the PIH. Which raises the intriguing possibility that people brought up under communism act more like rational economic agents than those (such as these Floridans) raised under capitalism.
** My picture proves that smoking is not necessarily bad for your chest.
"those (such as these Floridans) raised under capitalism": or in Cuba?
Posted by: dearieme | January 22, 2009 at 04:18 PM
Are they real? If so, I thoroughly approve...
Posted by: kinglear | January 22, 2009 at 05:02 PM
This is really just a comment on the rationality of people who win lotteries. Since those people are often risk-loving or innumerate, it is hardly surprising that they are bad decision makers.
As for the rest of us, the external validity of this study is small.
Posted by: TheOneEyedMan | January 22, 2009 at 05:30 PM
I believe you're forgetting selection bias inherent in the sample - given the odds involved ( http://tinyurl.com/magic-jackpot ), the rational are far less likely to consider even playing the lottery, therefore lottery winners are far more likely to be drawn from the ranks of irrational consumers.
As for the Czechs apparent rationality - one wonders how many of them even realized they were "playing?"
Posted by: Ironman | January 22, 2009 at 06:11 PM
It might not be irrational to play the lottery. Sure it is in pure expected value terms. But it's possible that the teeny chance of changing one's life is worth a dollar or two that you'll not miss. What's odd is that this study suggests your life doesn't change as a result.
But even if you grant that lottery players are irrational, what's significant is that people who are irrational over small sums are also irrational over bigger ones. This is not a trivial fact.
Posted by: chris | January 22, 2009 at 06:15 PM
You might want to look at the mental accounting link - it's to stumblingandmumbling/en.wikipedia...
Posted by: Alderson Warm-Fork | January 22, 2009 at 07:12 PM
Maybe lottery causes bankruptcy.
Let's say you get 100.000 $. It is good news, but no money enough to live of its interest (not to mention you gave it to Madoff). So, what do you do? You start some new bussiness, something that you have always dreamed of but wich you don't have any experience about, or you have as an employee, not as a manager. After a few time, the dream is over. You have lost your money and you are trying to get your old work back.
Here in Spain was very common that people who got money from their redundancy pay (45 days/year) opened a bar. Most of them were closed in 2 years. I know because they were my customers.
Posted by: ortega | January 22, 2009 at 07:59 PM
Just because all consumers aren't rational isn't an argument for paternalism.
People going bankrupt is a good thing. It teaches them and the rest of society an importan lesson.
Posted by: tbrrob | January 23, 2009 at 12:34 PM
As Orgega says, some people do invest their win "for their future" but they make risky (or plain bad) investments that go wrong. My hunch is that windfall money is easier risked that the money that's been sweated for.
Posted by: Bruce | January 23, 2009 at 01:18 PM
Speaking of Chance, Vegas is all so home of the most and largest trade shows for business in the world http://TradeShowsVegas.com Twice each year just the Fashion business brings several hundred thousand people to Vegas http://FashionWeekVegas.com They also gamble but these are business people
Posted by: Yoe Tike | January 24, 2009 at 02:46 AM
Hey all.well i know that Vegas is all so home of the most and largest trade shows for business in the world. thats why it a nice in intersting city!
Posted by: Las Vegas Hotel | November 02, 2009 at 04:51 PM