A long known tenet of personal finance is to avoid keeping up with the Joneses. We see this in all aspects of life. You don’t want to have the most beat up car in the parking lot. Look your best and very successful at church. Get that new purse everyone has. Let your kid get an iPhone because his friends have them. The list goes on and on. To a certain degree we all try to keep up with the mythical Joneses, often to our own detriment. With that in mind, what do you think happens when your neighbors win the lottery?
We find that a C$1,000 increase in the lottery prize causes a 2.4% rise in subsequent bankruptcies among the winners’ close neighbors
Researchers studied records in Canada because such data was available. Naturally they found that bankruptcies of neighbors increased, as did their ownership of physical assets like cars and motorcycles. Non-physical assets like retirement savings did not increase. To be sure, these weren’t the life-altering types of winnings with the average and standard deviation of C$4000 and C$12,000 respectively. But that’s just enough to see a bit of a lifestyle upgrade, which is just enough for the neighbors to notice.
The warning here isn’t around bankruptcy. It’s that economists can observe through real data that the Joneses phenomenon is real. The researchers sought to answer questions about income inequality through this study, and what they found was even a bit lottery winnings creates a gap we try to spend our way out of.