Optimal behavior for lottery winners (or anyone who comes into wealth unexpectedly)

July 24, 2011

Last week saw a couple in Scotland win the £161 million Euro-millions lottery, a truly enormous amount for any individual to suddenly have in the bank. Research indicates that they need to approach their new-found wealth as a source of potential danger as well as happiness. What do we know about the effect of winning the lottery (or unexpectedly inheriting a significant sum)? Obviously, they are now freed from the worries and stresses that come with not having enough money. However, the simple fact is that so much money, so quickly, doesn’t necessarily bring happiness.

  • Without planning, they will likely just shift to a new standard of living. Once they adapt to a bigger house, better cars, ennui will set in, and they’ll revert to a previous level of contentment.
  • There are more ways to spend money than ways which will make you happy. When money is cheap to us, we often throw it at problems, even when those problems aren’t solvable with money. As a result, non-monetary problems suffer.
  • As you move up social circles, your reference point changes to be that of your neighbor’s. So a Mercedes becomes normal, not something you’re particularly proud of.
  • This change of circumstance and social groups comes with new stresses and problems– ones which they have little experience with.

So how can lottery winners ensure that they actually do live happily ever after?

  • Plan an upward path: One of the best insights we’ve had is how quickly we adapt to changes in standards of living. Simple economics might say that we’d be indifferent between spending £10m per year over 10 years, than starting from £1m and working our way up to £30m. However, because we adapt quickly, it’s better to be constantly increasing your available income. The worst thing you can do is spend most of it in the first year - then every year seems worse than the last, rather than better.
  • Divide and Conquer: Put the number in its place by dividing the sum into manageable, purposed pieces. Say £80m for future income and investing, £30m for charitable causes, etc. That way the money doesn’t overwhelm you, and you can prioritize.
  • Have restraint: Spend as little as possible at first: pay off debts, splurge a little on a party for family, friends etc, and take a holiday. But the more you spend up front, the less you have to look forward to later. Saving, waiting, looking forward to, and having a change of pace are what makes people happier.
  • Don’t move, invest local: Seems simple, but it’s very important and hard. You’ve spent years defining yourself, your personality, your social circle etc. Moving to a rich neighborhood won’t surround you with people “like yourself”. In fact, if most of them were self-made rich, they may look down on your luck. Rather, stick to improving your neighborhood, your friends, your family. It will be much more rewarding!
  • Keep working, at least at first: Think very carefully about quitting your job – you need a reason to get up every day. True, negative feedback from your boss will seem less pressing, but it still improves you and your skills. If you do quit, have a plan for what you’ll do, something to challenge yourself and achieve. Make a new job for yourself, even if it’s improving your golf swing. Lack of goals => lack of achievement => lack of satisfaction.
  • Give to others: Don’t misunderstand me - this is actually a very selfish act. Work closely with a charity, or set your own up. This both gives a purpose and meaning to the wealth beyond spending, and reminds you how lucky you are. It will give a positive slant to your new wealth socially, and help you keep focused on what really matters.
  • Keep perspective: Travel to poor areas locally, or developing nations. Poor, but happy countries are the best. Remember that it’s perfectly possible to be very very happy with less money. If you think about how wealthy you are compared to David Beckham, that probably won’t make you happy. Now think about how well off you are compared to pretty much everyone else in the world. Feel better?

All of the points above might not be perfectly applicable to each individual of course, but they do provide some structure for thinking about how the new wealth should and shouldn’t change one’s life. Remember – you own it, it doesn’t own you.