I have sometimes jokingly contended that if you took all of the money in the world and divided it equally, ten years later the people who have the money now would have it again. Based on a study done by three academics at Kentucky, Pittsburgh, and Vanderbilt, there may be some support for my thesis!
Specifically, they studied lottery winners that received small to midsize jackpots ranging from $600 to $150,000 in the Florida lottery between 1993 and 2002. Then they compared bankruptcy filings for small winners (< $10,000) to big winners (> $50,000). Five years out, people who win $150,000 are just as likely to declare bankruptcy as those who win less than $10,000. There’s a lesson in the results:
“I’ve always been interested in whether you could solve people’s problems to some extent by giving them additional cash,” says Mark Hoekstra, assistant economics professor at Pittsburgh, who co-authored the paper with Kentucky’s Scott Hankins and Vanderbilt’s Paige Marta Skiba.
The study has policy implications for governments deciding how to help heavily indebted people who are struggling during economic downturns, Hoekstra says. It appears the simplest solution — giving them cash — doesn’t enhance longer-term financial stability, and only postpones, rather than avoids, bankruptcy. The lottery findings are consistent with a 2007 research paper that showed consumers initially used their 2001 federal rebate checks to reduce debt, but eventually debt returned to its pre-rebate level.
“Our research suggests that perhaps there is something more systematic about the types of people who get themselves into financial trouble — and the appropriate policy prescription for helping them out is going to be considerably more complex than giving them additional resources,” says Hoekstra.
“Winning the lottery undid any negative shock (that previously occurred) for the large winners, and they still ended up filing for bankruptcy,” Hoekstra says. “That is inconsistent with the idea that the only people who file for bankruptcy are those with negative shocks such as divorce, job loss or health issues.”
Unless people learn the basics of saving and investing, handing them a chunk of money does not seem to solve their financial problems. Advisors have a big role to play in creating financial literacy for a wider population—and apparently there is no shortage of work to be done.