Why you should hope your friends or neighbours never win Lotto

Wednesday, 27 November 2019

Sam Stubbs shares his thoughts on Lotto.

OPINION: Pity the poor friends and neighbours of the West Auckland couple who won the $18.2 million Powerball jackpot.

Having someone close to you become suddenly wealthy can wreck your personal finances.

Not only does people's satisfaction with their own wealth depend on how they think it compares to the wealth of people around them, but people often increase their spending when others do.

Our satisfaction with our wealth is directly related to how wealthy we think people immediately around us are.

One study from Canada found a rise in bankruptcies in streets in which someone won big on the lottery.

* I felt shame buying my first Lotto ticket after jackpot spiked

* $100k a lot or a little: What's wealthy in NZ in 2019?

* ANZ report shows simple steps to increase Kiwis' 'financial wellbeing'

* Something's missing from BNZ's guide to happiness**

Professor Paul Dolan from the London School of Economics noted the effect in his recent book Happy Ever After published by Penguin.

A big Lotto win might make you happy, but the truth is it would probably make you less happy than you think it would.

'Research has shown that in the two years after a lottery win, the neighbours of those who win larger amounts are more likely to file for bankruptcy,' he wrote.

'Part of the explanation for this is neighbours of lottery winners spend more of their income on visible goods such as cars and motorcycles in order to keep up.'

Now, you may be thinking, as I do, that this is pitiful. You may even think you are immune to such effects.

Think again. Research is clear. Your money life is not lived without reference to other people's.

You may think you would be really happy with a $1000-a-year payrise, but the truth is it's not only the extra spending/saving power alone that would make you happy.

If you got the $1000 and your colleagues didn't, you'd feel great.

If they all got $1000 rises as well, then it would be just fine, but you would not be as satisfied as if you were the only one who got the rise.

And if they all got $2000, suddenly the extra spending power of your $1000 feels pretty hollow.

We are social beings hard-wired to compare our places in the social hierarchy.

Dolan notes studies indicate that inequality of wealth among people in the immediate vicinity often (but not always) makes people on the wrong side of the inequality gap feel less satisfied.

'The more Porsches and Ferraris there are in a neighbourhood, the less satisfied people in those neighbourhoods are with their salaries,' Dolan noted one Swiss study found.

So how do you defend yourself, and your personal finances, from these conscious and unconscious wealth comparisons?

Dolan believes you might try by recognising that your perceptions of other people's wealth, and the happiness it brings them, are probably inaccurate.

It's certainly true a lift in wealth for the majority of people would increase their happiness by reducing hardship in their lives, but people wrongly imagine happiness increases continue in proportion to increases in wealth.

You also might give yourself something more concrete to measure yourself against.

The three most meaningful targets for most people are paying off their consumer debts, going debt free on a family home, and building a pool of savings.

These equate to taking control of your own financial destiny, and being resilient in the face of crisis like illness, or job loss.

There is a big difference in self-reported financial wellbeing for people with even relatively modest emergency savings compared to those with none.

The highest financial wellbeing, as measured by ANZ several years ago, was among those who had made their last ever mortgage payment.

GOLDEN RULES:

* Set your own targets

* Get rid of your debts

* Build your savings