How Your Neighbor’s Lottery Prize Can End Up Causing Your Own Ruin

Envy is a bad counselor says the Spanish proverb. Well, this simple phrase seems to be true, at least in economic terms. The Bank of Norway has shown that if your neighbor wins the lottery, your debts and those of the rest of the closest neighbors will increase on average in an attempt to ‘appear’ a level similar to that of the lucky one. It is not the first study to support this hypothesis and everything indicates that ‘envy’ takes control of the finances of those around the winner.

The most recent empirical proof is provided by a study by Magnus AH Gulbrandsen published in October by Norway’s central bank, the Norges Bank. The author carries out an empirical investigation of the causal relationship between the income of a household and the accumulation of debts of its neighbors that confirms the hypothesis presented at the beginning.

Using Norwegian administrative data on household characteristics, he constructs a data set consisting of the winners of a lottery prize and their neighbors. The sample is delimited by the researcher with lottery prizes ranging from 10,000 to 1,000,000 kronor (between 1,100 and 111,000 dollars) during the period between 1994 and 2006 and estimates the effect on the debt among residents living at a distance. distance of up to ten houses from the winner. This is what the Treasury will keep if you win the Gordo.

With this selection of data, the results of the study show a statistically significant debt response that, on average, equates to a 2.1% increase in debt, measured in terms of the lottery prize (For example, for a lottery prize of NOK 10,000, neighbors increase their debt by NOK 210 on average). A non-linear model suggests, according to the author, a decreasing effect with the size of the prize, this effect being 7% with the smallest prizes.

Seeking to leave no loose ends, Gulbrandsen estimates the impact of the lottery prize shock on residents’ rent, liquid assets, and imputed expenses. The estimated responses for income and liquid assets are roughly zero, he explains. The expense response is 3.1% of the premium during the first two years after the case was identified, which leads him to conclude that the residents borrow to finance a higher expense.

Winners spend 45% the first year

“Lottery winners spend a large part of their prize in the same year they win. In my sample, I estimate this spending response to be about 45% of the amount won. Using this estimate I can calculate the answer of Neighbors ‘debt as a part of the winners’ spending response. This percentage is 4.4% for the sample of small prizes and 4.8% for the sample of large prizes. Taking into account the existing estimates on How the spending response of the winners decreases with the size of the prize, my estimates imply that the debt response of the neighbors is roughly linear in the spending reaction of the winners, “he adds.

Continuing with the temporal scope, this indebtedness due to ‘envy’ also shows its persistence, according to Gulbrandsen: “The dynamic responses show that the levels of debt acquired in the year of study are persistent, since the debt continues to be higher than in the period prior to treatment up to five years after the initial impact “.

The closer to the winner, the worse

The researcher also finds evidence that “average debt increases more among the closest neighbors than among the most distant.” It also concludes that the effects of indebtedness are stronger among residents with a family structure similar to that of the winner and among residents who live in single-family homes (houses) compared to those who live in flats. Likewise, it finds that the effects are weaker (or even non-existent) among those households with a relatively short stay as neighbors of the winner.

Also in Canada

A 2017 study by the Federal Reserve Bank of Philadelphia offers similar conclusions. The authors, Sumit Agarwal, Vyacheslav Mikhed, and Barry Scholnick, also analyzed the behavior of different neighborhoods in Canada when a family in the neighborhood won the lottery. These researchers showed that the higher the lottery prize, the more likely their neighbors were to file for bankruptcy.

Canada is the perfect country to carry out an accurate study for some particularities of the country. Canadian ZIP codes contain, on average, only 13 households, making it easy and fast to research and analyze thousands of lottery winners and their neighbors. These economists found that for every 1% that the lottery prize increases there are 0.04% more bankruptcies in the neighborhood in the next two years.

In addition, these experts reveal that conspicuous or superfluous consumption (dispensable consumption of extravagant goods) is the most used mechanism to keep up with the neighbor who has won the prize. “The conspicuous consumption hypothesis focuses on specific products that are purchased and predicts that people trying to keep up with neighbors will be more likely to buy visible products that can be observed by other people.”

Purchase of ‘visible’ goods

“We have found that people who filed for bankruptcy after a close neighbor won the lottery have significantly larger holdings of visible assets. (for example, houses, cars, motorcycles …) with regard to other people who have also declared bankruptcy, “the authors say.

Everything indicates that the greater propensity to bankruptcy of people who live near a winner in the lottery is due to the hypothesis known as keeping up with Joneses, an American expression that refers to comparisons between neighbors. If the neighbor buys a car, I try to buy a similar or better one. The success in the life of an individual or a family is evaluated on many occasions by making comparisons with those around us and, therefore, trying to achieve a higher standard of living compared to the neighbor, brother-in-law or cousin. The great risk of using this ‘wand of happiness’ is that it may end up ruining you.