People who live next to recent lottery winners are more likely to go bankrupt, new research suggests.
According to a recent report from the Philadelphia Federal Reserve, an arm of America's central bank, for every $1,000 your close neighbour wins in the lottery, you are 2.4 per cent more likely to go bankrupt in the next two years.
- Big lottery winners can buy anything — except anonymity
- Millions of dollars of lottery wins go unclaimed in Canada every year
As evidence for their correlation, the group looked at Canadian data. That's because unlike the U.S. system which is made up of a patchwork of lottery system and Byzantine network of consumer financial data, Canadian information on the two variables is centralized and in complete control of either the federal or provincial governments.
By collecting data from various provincial lottery boards, the Philly Fed was able to compile a list of every Canadian who won at least $1,000 in the lottery for a 10-year window between April 1, 2004, and March 31, 2014. That is a list of 6,578 people.
They then cross-referenced that list against data from the Office of the Superintendent of Bankruptcies, which has an exhaustive list of every individual who went bankrupt in Canada during that time frame.
The result found an intriguing correlation between lottery wins and bankruptcies among people who live very close to them — specifically, people who share the same postal code.
"These areas are extremely small, often smaller than a city block in size," the report said. "Single apartment buildings, for example, can have multiple six-digit postal codes."
Using that method found that in a two-year window following a lottery win, there was a base case of 0.46 bankruptcies among someone in the same postal code, which averages around 13 households.
The reason, the Fed explains, is conspicuous consumption: Many people feel compelled to increase their own spending when they see physical evidence of exorbitant spending around them.
And the bigger the win for the Joneses, the more likely the Looky-Lous across the street were likely to go to the poor house trying to keep up with them.
"The size of lottery prizes increases the value of visible assets [houses, cars, motorcycles]," the report explains, "but not invisible assets [cash and pensions]."
Mo' money, mo' problems
The report compared data from the test group that shared a postal code with a control group of an average of 200 other households that live within a fifth of a kilometre. That's a close enough group that it would be subject to the same macroeconomic factors as the test group to test the different reasons for any bankruptcy filings.
The results were even more pronounced in low-income neighbourhoods than they were in high-income neighbourhoods. "Because this increased consumption of the poor will likely be financed by debt, this will eventually lead to financial distress for these poorer individuals," the report said.
The report found that it doesn't even require an exorbitant lottery win for neighbours to start overspending. It specifically excluded jackpots of more than $150,000 from their calculations.
And most tellingly, the paper found that a lottery win doesn't even guarantee financial comfort for the winners themselves: Out of 6,578 lottery winners analyzed, 824 of them declared bankruptcy themselves within a decade, the paper found.
"The larger the magnitude of a lottery prize, the larger the value of conspicuous assets on the balance sheets," the paper said.