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Size of Lottery Doesn’t Matter, Winners Declare Bankruptcy

This article was written by in Personal Finance. 15 comments.


A new study by researchers as University of Kentucky, the University of Pittsburgh and the Vanderbilt University Law School shows that people who win $150,000 from a lottery are just as likely as those who win $10,000 to declare bankruptcy within five years. I’ve often seen statistics that show that lottery winners often blow their winnings, declare bankruptcy, and find that an influx of cash for which they weren’t prepared changes their life for the worse, but this study goes farther by comparing these two groups of winners.

From the Yahoo Finance article describing the study, which will be published in a research journal:

They found… 5.5 percent [of lottery winners] declared bankruptcy within five years of taking home the jackpot. While the bigger winners were 50 percent less likely than small winners to file for bankruptcy within 24 months, they were more likely to file for bankruptcy three to five years after winning. The net result is that within five years, large winners were just as likely to file for bankruptcy as small winners.

The article points out that found money is often treated differently than earned money. When money arrives into someone’s possession through luck, like finding cash on the street, winning the lottery, and in some cases, getting a bonus payment, there’s a tendency to spend the money on something unnecessary.

While people don’t generally think of winning the lottery as having a negative effect, many winners would have been better off without the extra cash. While lottery commercials express the idea that a jackpot would be the solution to life’s problems, and the chance winning is more likely as it really is, it’s false hope. For the most part those who play the lottery end up spending more money on tickets than they’ll ever win. For individuals in difficult financial situations, it may seem like the only way out.

My coworkers and I used to buy lottery tickets when the jackpots were over $100 million. The stories of groups of coworkers splitting the winnings twenty ways and taking early retirement are inspiring, but the news cameras rarely follow their lives five years down the road. I participated because it was a small price to pay to participate in what’s more a social event, not because it was a chance to win money. But I do feel sorry for those who play the lottery with the belief that it’s the only plausible answer to the problem of needing money to move from one socio-economic status to another.

If you do win the lottery, try to manage the money responsibly. That will be almost impossible without prior knowledge of how to manage money, and many who play the lottery do not have this knowledge. Once you win, people will show up everywhere with suggestions. There is no privacy for lottery winners, so watch out for long-lost relatives and shady financial advisers.

Updated December 22, 2011 and originally published September 3, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 15 comments… read them below or add one }

avatar Mike - Saving Money Today

I will never win the lottery because I don’t play it! In my opinion the lottery is a sucker’s bet and people who believe they will win a fortune and have all their problems solved are kidding themselves.

I’m working on a post about a guy I know who spends a ton of money on the lottery every week. I’m talking like $50 a week, just crazy.

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avatar SimplyForties

5.5% of lottery winners isn’t very many. If 94.5% don’t declare bankruptcy I’m not sure it proves your point.

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avatar rewards

Like SimplyForties, I think that the statistic is misleading. How does this 5.5% compare to people who also bought tickets but did *not* win the lottery?

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avatar rewards

Like SimplyForties, I think that the statistic is misleading. How does this 5.5% compare to people who also bought tickets but did *not* win the lottery?

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avatar boomer

best way to win at lottery

Send your child to an in-state school with lottery scholarship.

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avatar boomer

best way to win at lottery

Send your child to an in-state school with lottery scholarship.

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avatar Yana

I like this study, since it shows that the great majority of winners do not declare bankruptcy. That’s nearly inspirational! ;) I don’t like the lottery and don’t play it, partly because of the lack of privacy for winners. My husband likes playing, though.

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avatar Yana

I like this study, since it shows that the great majority of winners do not declare bankruptcy. That’s nearly inspirational! ;) I don’t like the lottery and don’t play it, partly because of the lack of privacy for winners. My husband likes playing, though.

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avatar Xmarc

One way to keep your money after winning the lottery is change your phone number first. Too many “friends” show up. They’ll be glad to help you go bankrupt!

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avatar CommRE

The other replies beat me to it. First, I understand you didn’t write the article, you are only commenting on it like us. But to make a big deal out of the fact that 5.5% of small and large lottery winners declar bankruptcy means nothing. What is the percentage of the general public that declares bankruptcy? 94.5% of lottery winners don’t declare bankruptcy in 5 years. That’s not news. I came into $380,000 through unfortunate circumstances myself. I don’t think anyone expects me to go bankrupt because of it.

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avatar Luke Landes ♦127,380 (Platinum)

I probably emphasized the wrong point. What’s interesting is that the size of the jackpot doesn’t matter, at least in this limited study. Winners who receive $150,000 are just as likely to file for bankruptcy as those who win $10,000, even if that chance is only 5.5%.

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avatar CommRE

I agree, that is interesting that the size of the lottery doesn’t matter.

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avatar ajc @ 7million7years

Lou Eisenberg was infamous for ‘losing it all’ after winning the NY State Lottery: http://7million7years.com/2009/11/19/when-winning-the-lottery-aint-enough/

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avatar Barbara Friedberg

actually this is a legitimate behavioral finance concept; treating cash from different sources differently. The end result, you blow your cash, no matter where it comes from, it’s a problem.

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avatar kyunkyun

“The Ticket to Easy Street? The Financial Consequences of Winning the Lottery”
http://www.econ.pitt.edu/papers/Mark_lottery.pdf

“The lottery winners were linked to bankruptcy filings on the basis of first and last name and county of residence, with results shown in Table 2. Each winner was linked to any bankruptcy case filed up to five years prior to winning the lottery and within five years after winning the lottery. In all, 1,934 Fantasy 5 winners were linked to a bankruptcy in the five years after winning. This match implies a one-year bankruptcy rate among lottery players of just over 1 percent, which is similar to the filing rate of 1.0 percent for all adults in Florida from 1993 through 2001.

While it is possible that type I or type II errors were made in linking lottery winners to bankruptcy records, neither type of error should invalidate the research design. Due to the randomness with which amount won is determined, we should be no more or less likely to match winners of large sums than winners of small sums except for the causal effect of amount received on bankruptcy rates.”

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