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Behavioral Finance

What Lottery Winners Lose Out On Because of Human Behavior

Research shows that lottery winnings—and other major cash windfalls—can make life more complicated than you might expect. Converting it into a lifetime of financial stability takes some careful planning (and maybe some help).

Articles by Dan Egan

By Dan Egan
Managing Director of Behavioral Finance & Investing, Betterment  |  Published: March 26, 2019

Lottery winners face the risk of rapid lifestyle creep, making long-term contentment harder to achieve.

If you ever win the lottery—not that we’d advise playing—we suggest developing a plan to sustainably increase spending over time, and maybe hire a professional advisor too to help keep your behavior in check.

The largest lottery ever won to date was $1.5 billion, a truly enormous amount for any individual to suddenly have in the bank.

What happens when people who spend $1 on something with a $0.50 expected outcome ends up with millions? Behavioral research indicates that, in addition to happiness, the couple may want to approach their newfound wealth as a potential source of danger.

What do we know about winning the lottery and financial wellness?

Well, quite a lot, in fact. And the short of it is that unexpectedly gaining any large sum of money (whether lottery winnings or an inheritance) can lead to new unfamiliar problems.

Obviously, winning the lottery has the benefit of being free from the worries and stresses that come with not having enough money. However, the research indicates that gaining so much money, so quickly, doesn’t necessarily work out in the long run. Here are the facts:

  • Without a plan, lottery winners will likely shift to a new higher standard of living quickly—i.e. lifestyle creep. Once they adapt to a bigger house and better cars, ennui can set in, and they’ll revert to a previous level of happiness and well-being.
  • There are more ways to spend money than ways which will make you happy. When money is cheap to us, we often throw it at problems, even when those problems aren’t solvable with money. As a result, non-monetary problems suffer.
  • As you move up social circles, your reference point changes to be that of your neighbor’s. So a Mercedes can start to become normal rather than something you’re particularly proud of.
  • This change of circumstance and social groups likely comes with new stresses and problems, ones which lottery winners may have little experience with.

How can lottery winners help ensure that they live happily ever after?

Dealing with a windfall of cash takes more planning and intentionality than you might expect. Here are the principles we financial professionals would suggest if you find yourself with a windfall of cash.

Start with Betterment to create a plan.

Plan an upward path.

One of the best insights we’ve had is how quickly we adapt to changes in standards of living. Simple economics might say that we’d be indifferent between spending $10m per year over 10 years, than starting from $1m and working our way up to $30m. However, because we adapt quickly, it’s better to be constantly increasing your available income. The worst thing you can do is spend most of it in the first year – then every year seems worse than the last, rather than better.

Divide and conquer.

Put the number in its place by dividing the sum into manageable, purposed pieces. Say $80m for future income and investing, $30m for charitable causes, etc. That way the money doesn’t overwhelm you, and you can prioritize how you want to live.

Spend more tomorrow.

Spend as little as possible at first: pay off debts, splurge a little on a party for family, friends etc, and take a holiday. But the more you spend up front, the less you have to look forward to later. Saving, waiting, looking forward to, and having a change of pace are what makes people happier.

Don’t move; invest local.

Seems simple, but it’s very important and hard. You’ve spent years defining yourself, your personality, your social circle etc. Moving to a rich neighborhood won’t surround you with people “like yourself”. In fact, if most of them were self-made rich, they may look down on your luck. Rather, stick to improving your neighborhood, your friends, your family. It will be much more rewarding!

Keep working—at least at first.

Think very carefully about quitting your job – you need a reason to get up every day. True, negative feedback from your boss will seem less pressing, but it still improves you and your skills. If you do quit, have a plan for what you’ll do, something to challenge yourself and achieve. Make a new job for yourself, even if it’s improving your golf swing. Lack of goals => lack of achievement => lack of satisfaction.

Give to others.

And don’t misunderstand me—this can actually be a very self-fulfilling act. Work closely with a charity, or set your own up. This both gives a purpose and meaning to the wealth beyond spending, and reminds you how lucky you are. It will give a positive slant to your new wealth socially, and help you keep focused on what really matters.

Keep perspective.

Travel to less affluent areas near you, or less luxurious nations. Remember that it’s perfectly possible to be very very happy with less money and stuff. If you think about how wealthy you are compared to Jeff Bezos, that probably won’t make you happy. Now think about how well off you are compared to pretty much everyone else in the world. Feel better?

Don’t wait for a lottery win.

All of the points above might not be perfectly applicable to each individual of course, but they do provide some structure for thinking about how the new wealth should and shouldn’t change one’s life.

Remember—you own your wealth; it doesn’t own you.

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