21

It's been suggested that people who win the lottery are more likely to go bankrupt than if they had not. For example, an article on Smartmoney states:

More than 1,900 [lottery] winners went bankrupt within five years. That number implies that 1% of Florida lottery players (winners and losers) go bankrupt in any given year, about double the rate for the broader population during the study period.

The explanation is speculative, being:

The researchers offer a few theories on why so many winners went bust. Prior research has shown that lottery players have below-average incomes and education; it's no great leap to assume they tend to have limited financial literacy (even compared with a general population that has been shown to sorely lack it). Winners might also engage in something behavioral economists call mental accounting by treating their winnings less cautiously than they would their earnings. Of course, winners might simply "develop a taste for luxury goods that outlasts their money," the researchers write.

Are people who win lotteries are more likely to go bankrupt than the average population?

Are people more likely to go bankrupt as a result of winning the lottery? Or are people who play the lottery, and therefore more likely to win, simply predisposed to financial decisions that would lead to bankruptcy?

  • 1
    I don't have the time at the moment to gather links, but I've heard alot about Lottery winners going bankrupt. This American Life did a segment on a guy who's job it was to get people to sign over their tickets for lump sums before lumps sum payments were common. Mostly people go bankrupt due to a lack of skills associated with managing large amounts of money. And because they usually start a restaurant or some other overly risky venture and lose their capital. Also some Relatives and Friends may start looking you up for cash after you win the lottery, since it's public and a large amount. – Mark Rogers Aug 2 '11 at 18:01
  • In addition to Marks comments I would add that when you have assets bankruptcy can take on a slightly different significance: you declare bankruptcy in hopes of keeping some of you wealth even if you are (by a simple accounting) flat broke or worse. – dmckee Aug 2 '11 at 20:10
  • 3
    Gambling is generally a really poor investment, so people who gamle are not good at the maths or making sound economic choices. Hence, lack of managing large sums of money. – Per Alexandersson Aug 9 '11 at 10:39
  • 1
    Brian, you have said that the explanation is speculative: fair enough - even the author suggests that. But are you questioning the results? I haven't read the study myself, but it seems like a reasonable citation, which provides evidence, in the form of a study, of an interesting correlation. When this study was quoted as evidence, in an answer below, you dismissed it. Could you please explain why? – Oddthinking Aug 10 '11 at 16:47
  • 1
    @Oddthinking: Thanks for the comment. While I'm skeptical of the referenced study's results as a general phenomenon, I've not dismissed it outright. I am seeking corroboration of the conclusions as this particular study is limited to the culture and geography of Florida, which has a notably impoverished and notoriously uneducated demographic. Do more educated demographics demonstrate the same phenomenon? A “correct” answer ought to reference other studies that corroborate this one. – Brian M. Hunt Aug 11 '11 at 0:26
10
+25

Just this month, Hankins, Hoekstra, and Skiba published a journal article on this subject:

This paper examines whether giving large cash transfers to financially distressed people causes them to avoid bankruptcy. A comparison of Florida Lottery winners who randomly received $50,000 to $150,000 to small winners indicates that such transfers only postpone bankruptcy rather than prevent it, a result inconsistent with the negative shock model of bankruptcy. Furthermore, the large winners who subsequently filed for bankruptcy had similar net assets and unsecured debt as small winners. Thus, our findings suggest that skepticism regarding the long-term impact of cash transfers may be warranted.

There are a number of interesting graphs and tables in the paper, but I don't think I can reproduce them here without violating copyright/fair use. This one does a good job of summarizing the results, though:

Probability of bankruptcy with respect to time of winning the lottery.

...the bankruptcy rates of medium and large winners fall 0.87 (p = 0.023) and 1.63 (p = 0.001) percentage points in the first two years, respectively, which represent relative declines of 27% and 50%. These declines are offset, however, by increases of 0.5 (p = 0.287) and 1.21 (p = 0.049) percentage points three to five years after winning. The net result is that within five years after winning, medium and large winners are no more or less likely to file for bankruptcy than are small winners. This is true despite the fact that the median large winner won a cash prize ($65,000) that was sufficient to pay all of the unsecured debt owed by the most financially distressed lottery players ($49,000) at the time of winning.

The authors summarize their results by concluding that lump-sum payments (e.g., lottery winnings) statistically significantly reduce the probability of bankruptcy in the first two years after winning, however, this reduction is followed by a statistically significant increase in the probability of bankruptcy of similar magnitude three to five years after winning.

Note that this study only considered lump-sum winnings up to $150,000; I have not found any studies that track bankruptcies of larger cash payouts. I suspect this is due to the relatively small amount of data available on the large jackpot winners.

Update:

I read the abstracts of all of the articles cited by the Hankins/Hoekstra/Skiba paper, and none of them seem to specifically study bankruptcy frequency among lottery winners. One interesting theory arose from a paper by Thaler: He points out that one of the best predictors for one's level of consumption (i.e., spending) is one's income. Therefore, if one's income suddenly spikes due to a lump-sum lottery windfall, one might be very likely to increase one's spending, possibly taking on significant liabilities. The problem is: A lottery payout is only temporary, so once that money runs out one is unable to pay off one's debts.

  • This is the same paper that was referred to in the original article (and which xiaohouzi79 referred to in his answer below). It'd be very unfortunate if there were no corroborating studies, and in particular if there were no data on the winners of pots greater than $150,000. – Brian M. Hunt Aug 16 '11 at 14:35
  • 1
    D'Oh! I completely missed that this was the same paper that was in the original article! In the event that there are no other reputable studies on this topic, about what part of the authors' claims are you skeptical? All of the authors are reputable professors at large universities and this paper was peer-reviewed. If we include the popular, low-payout scratch-off lotteries, I'd guess that the average lotto payout is well below $150k (although I have no evidence for that). – ESultanik Aug 16 '11 at 15:08
  • 1
    I think my personal kernel of skepticism is about those who really “win” (i.e. the million dollar jackpot) – do those people go bankrupt more often? Perhaps the results of the cited study to extrapolate (i.e. more bankruptcies, but after a longer period of wealth). I'm also skeptical of this study because of its geographical limitations, as I mentioned in my response to xiaohouzi79's post. What's the origin of this association between lottery wins and bankruptcy? There must be more evidence than just this one study. – Brian M. Hunt Aug 16 '11 at 18:15
  • This might be a brain fart, but how can there be a negative probability of bankruptcy? – Jase Dec 4 '12 at 2:50
  • @Jase: I don't have access to the original paper at the moment, but I'm guessing that "0" on the graph is the mean probability of bankruptcy in the entire population, the plotted values are just the delta, and the Y-axis is just confusingly labeled. You're right, though: Negative probabilities don't make much sense. – ESultanik Dec 4 '12 at 15:07

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .