Lottery winners cause neighbours to go bankrupt, study shows

Keeping up with the Joneses leads to financial ruin

Lottery winnings could actually damage the economy, not benefit it (REUTERS)

People whose neighbours win the lottery are more likely to take financial risks that lead to bankruptcy, a new study has shown.

Researchers at the University of Alberta in Canada and Georgetown University in the US found that neighbours of lottery winners have a higher probability of bankruptcy owing to increased conspicuous consumption, financial risk taking and borrowing.

“Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors,” a paper detailing the research states.

The paper references the idiom ‘keeping up with the Joneses’, whereby people attempt to match the high spending of their peers in order to not appear socially or culturally inferior.

To understand how true this hypothesis was, the researchers studied data of 7,337 lottery winners and bankruptcy filers in an unnamed Canadian province between 2004 and 2014.
The study focussed on winnings lower than C$150,00, as larger lottery winners tended to move away to more prosperous neighbourhoods.

Their findings concluded that the larger the lottery winnings of one individual in a small neighbourhood, the more subsequent bankruptcies there would be amongst individuals in that neighbourhood.

This was due to the neighbours of lottery winners increasing their spending on items visible to their wealthy neighbours, such as cars. An earlier version of the study found that spending did not increase on non-visible items, like furniture.

“We also found that borrowing in the entire neighbourhood increases with lottery amounts,” the paper adds. “These findings are consistent with additional risk taking and debt accumulation to finance conspicuous consumption leading to financial difficulties and bankruptcy for nonwinning peers.”

The researchers suggest the study could prompt further research into whether wealth inequality in the broader economy could lead to the kind of financial distress that precipitates financial crises, such as those that occurred in 1929 and 2008.