Is It Wise to Give Away Your £115 Million Lottery Win?

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Is It Wise to Give Away Your £115 Million Lottery Win?

Giving away fourth biggest lottery prize in UK history—what could possibly go wrong?

By Dr. Raj Persaud

 

On New Year’s Day, Frances and Patrick Connolly from Northern Ireland became the fourth biggest lottery winners in UK history, scooping a jackpot of £114, 969,775, from the EuroMillions draw.

 

At one of the strangest press conferences given by any lottery winners, the couple unexpectedly announced they were going to personally donate the largest share of their winnings to 50 friends, family members, and charities.

 

Many friends and family will become millionaires overnight, they explained, yet most on their secret list, at the time of the press conference, remained unaware of their good fortune.

 

The couple, married for 30 years and with three daughters, plan to share this amazing news with friends in person. “The pleasure for me will be seeing their faces and asking what they want us to do for them,” said Mrs Connolly, as reported in The Daily Telegraph Newspaper.

 

Mrs. Connolly intends to complete her Ph.D. in Clinical Psychology despite the record winnings, but what would psychologists recommend in these circumstances?

 

The UK media have almost universally praised the couple for their generosity, but this may be naïve. Powerful emotions might become unleashed in these circumstances, perhaps in particular envy, in those who know the couple but who get passed over.

 

One key possible psychological problem for the Connollys is that they may inadvertently sow the seeds of discontentment in those who are not selected to benefit from their largess. Surely there’ll be friends and family who will wonder why they weren’t selected, and as result, for every one person who receives the Connollys’ windfall, there might be several others who are left to experience simmering resentment as the sole result of this ‘win.’

 

At the extraordinary press conference, Mrs. Connolly, 52, complained she was already agonizing over how to choose between friends. She was crying herself to sleep given that she couldn’t help everybody. It was also going to be ‘heartbreaking’ receiving begging letters from the public.

 

There is a world of difference, psychologically, between giving money to charities and causes as opposed to giving publicly to friends. Personal connections, psychologists might argue, could more inevitably engage in the powerful psychological competitive process of who got what and why.

 

There is already some intriguing scientific evidence that similar wins unleash a comparison mechanism in those close to lottery winners and that this ends in very bad place, psychologically, even ultimately producing financial ruin.

 

Maybe you should also be careful in ‘playing god’ by altering people’s lives in such a dramatic manner. Additional research finds an unexpected impact on marriage rates of single women following big prize wins.

 

 

Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnick, recently published a study which examined what happened to the close neighbors of Canadian lottery winners, uncovering a tendency for more subsequent bankruptcies.

 

The authors of the study argue for a ‘keeping up with the Joneses’ effect, whereby when your neighbor suddenly has more money (through a lottery win), you automatically tend to spend more on visible extravagances. But as these neighbors haven’t experienced a hike in earnings, compared to the lottery winners, this means they often end up spending what they can’t afford, ending up bankrupt.

 

The study, entitled, ‘Does Inequality Cause Financial Distress? Evidence from Lottery Winners and Neighbouring Bankruptcies’ could be said to directly measure this envy or psychological comparison effect in those living physically close to a lottery winner. The finding suggests that for a significant number of people, being near to those who get rich suddenly, is not a positive experience.

 

The authors of the study argue that experiencing a drop in relative income causes the poorer to increase spending to match the extravagant displays of consumption of the rich: “keeping up with the Joneses.” But this increased consumption of the relatively poor must necessarily be financed by debt. This eventually leads to financial stress for poorer neighbors of lottery winners.

 

The authors of the study from the National University of Singapore, Federal Reserve Bank of Philadelphia and the University of Alberta, used bankruptcy filings in Canada provided by the Canadian bankruptcy regulator.

 

 

Examining specifically whether living near to lottery winners meant you were more likely to go bankrupt in the two years following a lottery win, the study examined very close neighbors of the lottery winner. These were residents within the same six-digit postal code, meaning an average of 13 neighboring households.

 

The study found that an increase in the dollar amount of a lottery prize increases the number of subsequent bankruptcy filings among close neighbors of the winner.

 

The study, published in the Federal Reserve Bank of Philadelphia Working Paper Series, contends that the sudden arrival of obvious income inequality, which is what happens when someone in your neighborhood wins the lottery, induces poorer neighbors to consume more visible (rather than invisible) commodities to “keep up with the Joneses.”

 

This leads to additional and unsustainable borrowing among the relatively poor financing this additional conspicuous consumption, eventually resulting in financial distress and bankruptcy.

 

As Canadian bankruptcy data include the full balance sheet of bankruptcy filers, this allowed the researchers to investigate the assets owned by each bankrupt.

 

Assets of bankruptcy filers can be divided into conspicuous assets that are “visible” such as cars, houses, and motorcycles, as opposed to assets ‘invisible’ to neighbors, such as cash and financial assets.

 

Those who filed for bankruptcy after a larger lottery win of a close neighbor had significantly larger holdings of visible assets (e.g., cars, motorcycles, houses) relative to the holdings of these same visible assets by those who filed for bankruptcy after smaller lottery wins of a close neighbor.

 

While the research examined small neighborhoods around lottery winners, it may have implications for the economy at large. It could be that income inequality and income comparison may lead to excessive and unsustainable debt accumulation among the less well-off. The authors of the study point out that income inequality peaked in the periods immediately before the financial crises of 1929 and 2008.

 

The researchers also point to previous surveys asking individuals to estimate the income levels of their peers. Those who believe that they are poorer than their peers have higher levels of debt and greater likelihoods of financial distress.

 

Another study on the effect of lottery wins examined the impact on your love life. The research entitled ‘Lucky in Life, Unlucky in Love? The Effect of Random Income Shocks on Marriage and Divorce’ found that marriage rates among single women fall by forty percent as a result of winning big on the lottery.

 

The research by Scott Hankins from the University of Kentucky and Mark Hoekstra from the University of Pittsburgh, examined the effect of the Florida Lottery, comparing recipients of large prizes to those of smaller ones.

 

One interpretation of their results, published in the Journal of Human Resources, is that additional income makes single life more attractive. This effect was found for single women but not single men.

 

Nearly one in 10 single women will be induced not to marry as a result of a big money lottery win. Additional income encourages single women to remain unmarried.

 

Given the number of surprising consequences that researchers have uncovered following big money wins, it would appear that lottery winners should not assume that they can predict the seismic impact on those around them.

 

In a sense, their gamble has only just begun.

 

References

 

Does Inequality Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies. Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnick. FRB of Philadelphia Working Paper No. 16-4 .

 

There is an updated version of the paper titled “Peers’ Income and Financial Distress: Evidence from Lottery Winners and Neighboring Bankruptcies”. It is available here https://philadelphiafed.org/-/media/research-and-data/publications/working-papers/2018/wp18-22.pdf?la=en. This new version offers more evidence on additional borrowing by neighbors after lottery wins and other mechanisms.

 

“Lucky in Life, Unlucky in Love? The Effect of Random Income Shocks on Marriage and Divorce.”  Hankins, Scott, and Mark Hoekstra Journal of Human Resources, 46(2): 403–426.

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