Lottery Winners as Natural Experiments

by on September 30, 2012 at 7:27 am in Economics, Law | Permalink

The Detroit News: A Lincoln Park woman who won $1 million in the Michigan Lottery and was later convicted for still collecting state welfare died Saturday from an apparent drug overdose.

…Clayton isn’t the only Michigan Lottery winner to become notorious after making headlines.

In August, millionaire Freddie Young, of Detroit, was sentenced to 20 to 35 years in prison for fatally shooting his daughter’s landlord.

Young, 64, was convicted on second-degree murder and felony firearm charges in the May 2011 killing of Australian native Gregory McNicol.

Prosecutors said Young won an estimated $1.57 million share of a Michigan Lottery jackpot in February 2011. Three months later, he shot 45-year-old McNicol over $1,000 in back rent owed by his daughter.

Here is my previous post on this subject with more systematic data.

Greg G September 30, 2012 at 7:47 am

Winning the lottery fails to change people’s character or intelligence. Is anyone really surprised by this?

Frank September 30, 2012 at 8:29 pm

The lottery seems to select for individuals with low impulse control, less education, and/or limited intelligence.

The trifecta may end badly for many, but limited intelligence alone need not result in financial devastation.

There are favourable financial biases among average aptitude individuals, particularly those with high impulse control, which lead to capital preservation and continued wealth accumulation.

JWatts October 1, 2012 at 2:20 pm

“Winning the lottery fails to change people’s character or intelligence. Is anyone really surprised by this?”

If you are an adherent of the school of thought that being poor has nothing to do with character or intelligence, then yes, this is counter to your world view.

Greg G October 2, 2012 at 8:18 am

Actually I do think that character and intelligence affect the odds of someone being poor.

I just don’t think that it follows from that that winning the lottery will change your character or intelligence.

If your world view is that having money is key to good character and intelligence you may disagree with that.

Rahul September 30, 2012 at 7:47 am

(a) “The sort of people who buy lottery tickets are usually bad apples”

OR

(b) “Winning a lottery nudges people to do bad things”

OR

(c) “Lottery winners who do bad things are more likely to get noticed”

Which one is it?

Greg G September 30, 2012 at 8:02 am

OR
(d) “Buying a lottery ticket doesn’t say much at all about the buyer.

Andrew' September 30, 2012 at 8:31 am

These are called hypotheses.

Jim D September 30, 2012 at 11:38 am

Or (d): People who purchaselottery tickets are are self-selecting for making irrational choices

Brian Donohue September 30, 2012 at 9:54 pm

I thought a lottery ticket was economically justifiable for lower-income people on expected utility grounds-arguably anyway.

Emphasis on expected- even for the winners apparently.

Gunnar Tveiten October 1, 2012 at 2:44 am

Why would that be ? A lottery is a high-risk activity with an expected ROI under unity.

Arnie October 1, 2012 at 9:15 am

Sometimes they are above unity. More importantly, if preferences are convex then the expected utility of the lottery is greater than the utility of the expected value of the lottery.

KLO October 1, 2012 at 10:16 am

Let’s look at it this way: you are a poor person with no talents or opportunities to become wealthy without the lottery. You could put $100 a month in a savings account earning essentially no interest and your life would not change very much at all or you could buy lottery tickets, which will give you a small chance of achieving your dreams of unimaginable wealth. It seems to me that poor people are being perfectly rational when they buy lottery tickets.

gh October 1, 2012 at 3:36 pm

High risk? Tickets are a few bucks.

Expected value? Nobody buys enough tickets for that to matter even if it was over break even.

Compare this to dedicating your life and money to becoming president, where the stakes are higher and the odds are worse.

But we tell our children that they can become president, and understand that even if they fail, they will be morally superior, as exemplified by this years GOP candidates.

Say what you will about lotto winners, but at least they admit they got lucky.

Say what you will about lotto winners, but at least they admit they got lucky.

Jon October 1, 2012 at 12:20 am

(e) “Poverty isn’t the problem; it’s the consequence.”

JWatts October 1, 2012 at 2:26 pm

(c) “Lottery winners who do bad things are more likely to get noticed”

The underlying paper looks at a statistically significant group (35K+) and then looked at public records of bankruptcy in the local area with names matching the local lottery winners. If you assume that the bankruptcy records are relatively comprehensive then C is probably not a substantial factor.

Zainuddin October 2, 2012 at 8:57 am

None of the above. Money confers financial power. Working for that money confers a restraint on that financial power. The lottery confers financial power without the restraint that work provides.

LemmusLemmus September 30, 2012 at 8:06 am

I think the point he’s trying to make is that the poverty-behaviour correlation is not due to an influence of poverty on behaviour.

mw September 30, 2012 at 9:48 am

and i’m glad that he’s trying to make that point–i’m always excited to see what the first inane thing i’ll read in the morning is. sort of gets the ball rolling on the whole day.

Lars September 30, 2012 at 10:26 am

That’s certainly the point he wants to make, but it’s not supported by either this or his linked post.

ladderff September 30, 2012 at 10:49 am

Can the snarkers here please tell us why this doesn’t support (do yo) know what support means in this context?) this point, or what (if any) empirical result they would accept as support?

Lars September 30, 2012 at 11:03 am

Read this for one way this point is ridiculously flawed.

ladderff September 30, 2012 at 11:28 am

You must be kidding. Points #4, #3, and #1 at your link basically say, “the poor suck with money.” It offers homely explanations for why, but no evidence at all as to whether Greg G’s apt summary of the post (“Winning the lottery fails to change people’s character or intelligence. Is anyone really surprised by this?”) is correct.

It pretty obviously is. I suppose that your link could have included a #6 explaining why poor people waste their money on lotto tickets.

Lars September 30, 2012 at 11:41 am

An astute reader would notice that I wasn’t responding to Greg G, whose point is likely true.

Jan September 30, 2012 at 12:38 pm

Greg’s point, which makes sense, isn’t mutually exclusive to Lem’s statement, which doesn’t make sense.

These lottery winners likely grew up in poverty and spent a good deal of their lives in it. Would winning the lottery really be expected to instantly undo a lifetime of the negative influences of poverty, assuming that poverty does lead to a higher likelihood of engaging in illegal activities and lower achievement? Hint, the assumption here is true.

LemmusLemmus September 30, 2012 at 2:08 pm

Jan: It wasn’t really my statement, just an explication of what I think the blogger is trying to say. As it happens, though, I think there is quite some truth in that opinion. I have laid out my view here. As far as I know, there isn’t an awful lot of high-quality evidence on the question, but perhaps you’ll concede that at least the view makes sense.

According to the standard economic model of crime (Becker) and the popular anomie theory of crime (Merton), yes, we should expect an instant reduction of the participation in illegal activities once poor people become rich.

Cliff September 30, 2012 at 8:51 pm

“Hint, my assumptions are true”- classic

Jan September 30, 2012 at 9:07 pm

Lemmus, did not mean to attribute the idea to you, just the statement. I can’t follow the link you provided–doesn’t seem to work–to understand how much your view aligns with what you think Alex meant.

I wouldn’t be surprised if some crimes, like stealing cars, do go down once someone has run into a pile of money. Though I think a passive crime like continuing to collect welfare is a bit different. And shooting somebody is a different kind of illegal activity altogether, and not one that is always related to stealing (and definitely not so in this case).

LemmusLemmus October 1, 2012 at 1:58 pm

This link should work.

stephen September 30, 2012 at 8:10 am

Professional athletes are good natural experiment as well.

stephen September 30, 2012 at 8:11 am

Though, I should say, less random in assignment.

liberalarts September 30, 2012 at 9:19 am

Professional athletes are born with unusually strong endowments, but unlike lottery winners they also have to work very hard to hone that skill.

stephen September 30, 2012 at 9:56 am

I agree 100%. I posted, then thought about it. They all can’t be nuggets :)

mb October 1, 2012 at 5:58 am

Not random at all. Typically, they need a lot of parental/institutional support and investment, as well as hard work to develop their abilities.

Andrew' September 30, 2012 at 8:31 am

Not running the entire welfare system partly by lottery is throwing away potential data (and if that doesn’t convince you, potential papers).

Nikki September 30, 2012 at 11:01 am

“Kept collecting welfare” and “went violent to avoid paying $1,000″ sounds like the opposite of “squandered all the money, ended up penniless again,” no?

Doug September 30, 2012 at 1:37 pm

The worst thing about being poor in America isn’t a lack of material resources (look at how well fed the poor are), it’s having to live around other poor Americans, who are in large part brutish, criminal, uncultured, irresponsible and unhygienic.

That’s why welfare, even assuming the revenue comes from some magical fount, doesn’t on the whole make anyone better off. For starving people welfare decreases the amount of the undesirable suffering (hunger). But when the American poor gain more money they spend almost all of it to move away from other poor people. This has no effect on the undesirable suffering (living next to brutish people), it merely spreads the suffering around to a larger group.

Ask yourself. There are two gated communities on golf courses made up of newly constructed mansions. One is populated by surgeons and investment bankers, the other is populated by lottery winners and NBA players. Which one would you move your family to.

Jan September 30, 2012 at 9:16 pm
JWatts October 1, 2012 at 2:56 pm

“Megan McArdle also posted on this issue”

+1 for the link, the article was informative

Nyongesa October 2, 2012 at 12:09 am

NBA players? I think (Surgeons and NBA players, versus, Lottery Winners and Investment Bankers) are a more realistic grouping, You do realize how much more than raw talent goes into becoming a successful NBA player?

Skye Winspur September 30, 2012 at 4:17 pm

One could say that this “experiment” has been conducted since the dawn of civilization.

“The lover of money will not be satisfied with money; nor the lover of wealth, with gain. This also is vanity. When goods increase, those who eat them increase; and what gain has their owner but to see them with his eyes?….riches were kept by their owners to their hurt, and those riches were lost in a bad venture; though they are parents of children, they have nothing in their hands.” (Ecclesiastes 5:10-14)

Cliff September 30, 2012 at 8:53 pm

What is the relevance of that bible passage exactly?

Bill September 30, 2012 at 7:44 pm

Inheritance is a lottery.

I’ve seen kids spoiled by inheritance–drugs, divorce, alcholism, inability to hold down a job or no desire to get one.

Thank you for highlighting the problems of lottery inheritance.

Cliff September 30, 2012 at 8:56 pm

Is it? You couldn’t have had any other parents than those you did.

Rahul October 1, 2012 at 1:13 am

What about the Spermal-10-millimeter-sprint?

mobile September 30, 2012 at 8:58 pm

Reminds me of Rodney King, who won $3.8 million in the Los Angeles Police Brutality Lottery.

jim October 1, 2012 at 2:54 pm

Money doesn’t make you a better person. Do lottery winners use that money to go to college, or travel to interesting places? No, you just end up being the richest guy in the trailer park.

Teri Pittman October 1, 2012 at 3:29 pm

Keep in mind that some of the poor people in prison are there because they can’t financially cover the fines for an offense, or hire a decent attorney to defend them. Court appointed attorneys are there just to get the defendant to agree to a plea bargain. I’ve personally known of one that couldn’t even remember her client’s name, because she had taken on too many cases.

Lottery tickets are not just about winning and that is why they are more satisfying emotionally that putting $100 in the bank. One gets the fantasy of winning and what one would do with all that money. Yes, there are stories of incredible savers that have endowed college scholarships from a lifetime of earnings. That sort of savings comes from being extremely disciplined and living a life of frugality that few would envy. It’s a long shot, but it’s better than no shot at all.

Floccina October 1, 2012 at 6:55 pm

I still is true, a fool and his money will soon be parted.

georgia October 2, 2012 at 1:05 am

So we all agree that poor people play lottos because they’re stupid? Seriously? Is it such a crazy idea that poor people play lotteries and rich people avoid them because lotteries are progressive? Doesn’t that make more sense?

When the expected value of a lottery is positive, millionaires will swoop in and buy all the tickets. This is an example of a regressive system. The difference between winning 10 million and 100 million matters a great deal to a rich person calculating the odds, and so expected value is very important.

But it means nothing to a poor person. The bulk of the change to the quality of life is in the first million, and the rest is just paper. And they can’t spend enough individually for stats to matter anyway.

The expected value has to be negative for the system to be progressive. And this is good because we want poor people to win lotteries.

Finch October 2, 2012 at 1:04 pm

> The bulk of the change to the quality of life is in the first million, and the rest is just paper.

That’s an argument for 300 $1,000,000 prizes rather than one $300,000,000 prize. I do think the single bigger prize would generate more ticket sales, but I don’t know if that’s been studied.

Colin October 2, 2012 at 9:05 am

So we all agree that poor people play lottos because they’re stupid? Seriously?

Way to completely miss the point.

buy butalbytal October 23, 2012 at 8:52 am

georgia, I am totally agree with your thoughts. Keep doing these type of work.

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