Contrary to popular belief, not everyone loses their friends and goes bankrupt writes Tim Harford in The FT
At the start of the graphic novel Bloke’s Progress, our everyday hero Darren Bloke isn’t coping with the everyday stresses of life. He has a tedious job, a grinding commute, squalling children and too many bills to pay. Then he wins the lottery — and his troubles truly begin.
First, Darren becomes estranged from his friends, who keep pestering him for money. He hangs out with a richer crowd but feels out of place. He divorces his wife and marries a new woman. Then she divorces him. His money is soon gone, and so, too, are his family and friends.
In Bloke’s Progress, Darren is saved by conversations with the spirit of the Victorian sage John Ruskin. (Of course!) Ruskin’s insights deserve a separate column — or a book. But Darren’s tale made me wonder: is this what happens to people who win the lottery?
A glance at the newspapers suggests that it is. The Courier Journal tells the tale of David Lee Edwards from Ashland, Kentucky. He won $27mn in 2001, spent it on drugs, fast cars and a Learjet. He was living in a storage unit within five years, and died penniless. The Guardian explains that Michael Carroll, self-proclaimed “king of chavs”, was declared bankrupt just eight years after winning nearly £10mn — while Lee Ryan ended up sleeping rough, and spending time in jail for handling stolen cars, despite winning £6.5mn. If only the spirit of John Ruskin had been there to save them all.
But while these cautionary tales offer us a moralistic narrative arc that sticks in the memory, they aren’t necessarily typical. A lot of people win big prizes on the lottery, enough to allow us to draw more subtle — and less tragic — conclusions.
First, do lottery wins estrange us from our friends? Darren Bloke’s fate seems plausible: his friends kept asking him for money, leading him to feel exploited and them to accuse him of meanness. Yet a study by Joan Costa Font of the London School of Economics and Nattavudh Powdthavee of Warwick Business School finds that people who win more than £10,000 on the lottery spend more time socialising with their friends, although less time talking to neighbours.
This result won’t come as a shock to those who read a 2016 study by Emily Bianchi and Kathleen Vohs, which found that richer Americans tended to spend less time with neighbours and family, and more with friends. The simplest explanation is that money makes it easy to socialise for pure pleasure, while reducing the need to maintain relationships for practical reasons, such as sharing childcare.
Second, do lottery winners blow their winnings and lapse into poverty? Here, myths abound; the National Endowment for Financial Education is often cited as the source for a claim that 70 per cent of lottery winners go bankrupt. The NEFE has issued a press release explaining that it has not made that claim and has no reason to believe the claim is true.
A study by the economists Scott Hankins, Mark Hoekstra and Paige Marta Skiba looked at 35,000 lottery winners in Florida, of whom 2,000 later filed for bankruptcy (that’s less than 6 per cent, not 70 per cent). The researchers did find that lottery winners were more likely to file for bankruptcy than non-winners. Perhaps that is not surprising, since lottery enthusiasts tend to be low-income, and most of them don’t win much. Hankins, Hoekstra and Skiba found that bankruptcy struck with equal likelihood whether people won less than $10,000 or more than $50,000.
These Floridian winners, then, were more likely to face bankruptcy than non-winners, but bankruptcy was still an unusual outcome. Nor did it make any difference how much they won.
Third, do lottery winners quit their jobs, as Darren Bloke did? Not according to a study of Swedish lottery winners who had won an average of 2mn Swedish kronor — roughly £200,000 — at some stage between the mid-1990s and 2005. This was about eight times the annual salary of a nurse or police officer in Sweden at the time. The researchers, Bengt Furaker and Anna Hedenus, found that some of these winners reduced their hours or took some unpaid leave, but 62 per cent carried on working exactly as before, and only 12 per cent quit their jobs completely. Either people felt that the jackpot wasn’t quite large enough to make it sensible to quit, or — perhaps more likely — they rather enjoyed their jobs. John Ruskin, who celebrated the value of honest labour, would surely have approved.
Thus far we’ve seen that lottery winners spend more time hanging out with friends, are not notably at risk of bankruptcy and often keep working in their old jobs. The big question remaining is: are they happy?
Yes, say Erik Lindqvist, Robert Östling and David Cesarini, who studied lottery winners in (again) Sweden. They find that winners of large prizes were significantly more satisfied with their lives — and in particular were significantly more satisfied with their finances. There is little sign in this data of the feckless or reckless lottery winners who squander their winnings.
The overall impression I get from these studies is that lottery winners are . . . well, rather sensible. “I won’t let it change my life,” goes the cliché, and perhaps the cliché is true.
Lottery winners typically use their money to increase their financial security and to spend more time with friends. They rarely quit their jobs. Some squander the money; most do not. Ruskin argued that money had no value unless it was wisely used. Lottery winners don’t do as badly as we might have feared.