Are Your Neighbors Making You Poor?

In October 2016, a study was published with the title “Does Keeping Up with the Joneses Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies.”

I suppose that’s a relatively exciting name for an academic paper, but a bit underwhelming given how interesting the findings are.

The media went in the complete opposite direction. The study was covered in articles like “Why lottery winners make their neighbors go broke,” “Living Near a Lottery Winner Has A Surprising Downside,” and “Why You Might Go Bankrupt If Your Next-Door Neighbor Wins the Lottery.”

Yikes.

Let’s take a look at the study ourselves and decide what we think it shows.

The Study

Canadian postal codes are very small. The median postal code has only thirteen households. This is great for studies, because it means that we can assume that everyone in a given postal code is a close neighbor. Compare this to the U.S., where postal codes cover a much larger area and any two people selected at random are unlikely even to know each other.

Using this fact, researchers looked at lottery wins and bankruptcy filings within Canadian postal codes. While our minds jump to the $300,000,000 Powerball jackpot when we think of lottery winnings, the researchers looked at more modest winnings between $1,000 and $150,000.

What they found was that a lottery win made it more likely that the winner’s neighbors would declare bankruptcy. The larger the win, the more bankruptcies.

They also looked at the balance sheets of those declaring bankruptcy. They found that families declaring bankruptcy in a lottery neighborhood had more “visible assets” – houses, cars, motorcycles, etc. – than families declaring bankruptcy in a non-lottery neighborhood. We also see that the larger the win, the more value in visible assets the neighbors have. This mostly consists of nicer cars and more expensive renovations to the house. At the same time, we see no change in “invisible assets” – cash and investments.

What Does This Tell Us?

Directly all this really tells us is that when one person gets an unexpected influx of cash, his or her neighbors become more likely to spend extra on cars and home renovations that they can’t really afford.

But, the implications are where this gets interesting.

First, keeping up with the Joneses is a real, provable phenomenon. Someone with an influx of cash may go and buy a nice car or some other splurge, only to have his or her neighbors follow suit with splurges of their own. But without the cash influx.

Second, and more interesting to me, is an implication based on how widespread this phenomenon is. This is not just a cartoonishly vain character seeing their neighbor’s new Mercedes and storming out to the dealership to one-up him. This suggests that keeping up with the Joneses is not simply a problem of too much pride. Instead, it is a subconscious trap that any of us can, and many of us do, fall into.

Our sense of normal is based on what we see and experience on a regular basis.

We see the new addition to our neighbor’s house every day, but we don’t see their pay stubs or their investment accounts. Or in this case, their winning ticket.

We see pictures of friends going out on the town on Facebook, but we don’t see pictures of their nights in or their brown bag lunch.

We see conspicuous consumption all around us and it becomes our normal, whether we can afford it or not.

So keep your guards up, friends. We are not too smart or too financially savvy to fall into the keeping up with the Joneses trap when we aren’t paying attention.

An interesting finding that didn’t quite fit into the narrative of this article is that the researchers found that the effects were worse in neighborhoods with higher income inequality. While this study focuses only on the neighborhood level, do you think it could be applied on larger scales? Does rising inequality in the United States cause increased debt and financial distress through subconscious keeping up with the Joneses? Let me know your thoughts in the comments.

14 thoughts on “Are Your Neighbors Making You Poor?”

  1. Your last post in interesting, because I’ve been wondering if the expansion of credit over the last few decades has contributed to income inequality.

    I know the average mortgage and car loan used to be much shorter than currently, and therefore housing and vehicles were relatively cheaper because people couldn’t afford cars and housing that were so much compared to income. People put more and more things on credit, like phones. But credit expansion meant those things could inflate much faster, corporations got their sales, banks got their loans and interest on the books…

    and wages didn’t have t0 go up to keep the wheels of commerce turning.

    I wonder if expanding credit kept that old Henry Ford innovation (pay workers better to make your market) from being necessary even while encouraging the consumerism that’s driving the bankruptcies your study shows.
    Emily @ JohnJaneDoe recently posted…State of the Blog: February 2017My Profile

    1. This could definitely be true, as well. The inequality and the expansion of credit could be feeding on each other in a feedback loop. People see their neighbors with more stuff and can buy it on credit, so they do. They then are spending more money on interest payments and saving less, which expands wealth inequality and leads to further reliance on credit to keep up with the Joneses.

      It certainly seems like lifestyle costs are expanding even as wages have stagnated, so you could be right about expanding credit replacing the Henry Ford approach.

      Thanks for the comment, Emily.
      Matt recently posted…Are Your Neighbors Making You Poor?My Profile

  2. I’m definitely worried about the next 2-3 years. There has been a lot of credit issued in the past 8 years. I don’t know if many people could handle losing their job, or a downturn in the economy of any kind. The stock market is at an all-time high based on speculation of new policy. Who knows what will happen.

    To prepare, I’m looking to keep my savings above $10k in cash and continue to pay down my debt. I want to ensure in all situations that I will be fine.
    Erik @ The Mastermind Within recently posted…The 5 Love LanguagesMy Profile

    1. I’m with you, Erik. We seem to be overdue for a recession, and yet the stock market keeps climbing. The wide use of credit seems like it will amplify a crash whenever it happens to occur. I try to stay away from predictions, but I do think we should be bracing ourselves at this point.
      Matt recently posted…Are Your Neighbors Making You Poor?My Profile

  3. Interesting study. I didn’t realize that Canadian postal codes are that small. It’s hard not to compare yourself to others, but to have it affect your spending habits is taking it a step further. I think the only influence someone else purchases has had on me would be a food item, something smelling or looking good might tempt me to want to buy that item. 🙂

    I agree with the points on credit. We are borrowing at an alarming rate. It can’t continue indefinitely.
    Brian recently posted…Income: Are you Being UnderpaidMy Profile

  4. I guess the key is that people are seeing visible signs of ‘success’ such as cars and houses, but not necessarily intrinsic happiness of the lottery winner. I happened to find minimalism first, and the physical/emotional freedom, then the financial freedom came from that… not the other way around like the route many people take. I guess for me having less stuff makes me the happiest, so even if I won the lottery myself, I would probably give away a lot of it to ‘do good’. That would be the best feeling in the world. And, yes, I probably would be a little jealous if I knew someone who had the opportunity to do all that good with a large chunk of change. 🙂
    Primal Prosperity recently posted…From Cubicle to CoffinMy Profile

    1. I agree. I like to think that I have learned enough about money and happiness that I would not go out and splurge on material items if I were to get a large influx of cash. You definitely get a lot more happiness out of doing good for others than buying things for yourself.

      Thanks for stopping by!
      Matt recently posted…Are Your Neighbors Making You Poor?My Profile

  5. I do wonder in America today with social media if that is pushing people to live beyond their current means to keep up with the social media “jones.” I remember I read an article that 50 cent the rapper was in court after he had declared bankruptcy but showed up on instagram with stacks of cash. He had to confess that it wasn’t real and that he was trying to keep up the image with fake stacks. Clearly even those that portray the lifestyle can’t afford it. Anyway really interesting study and article as always!!!

    1. It does feel like social media is sort of expanding our neighborhoods, in a way. This can be good in some ways, like having a wider net of people to lean on if we need help. But it does seem to add to the keeping up with the Joneses peer pressure to live up to the lifestyle that others portray, even if that portrayal is misleading, like you said.

      Thanks for the comment!
      Matt recently posted…Are Your Neighbors Making You Poor?My Profile

  6. There’s was a study a few years ago in California by the fed that showed suicides were more likely in wealthy neighborhoods. The concentration was actually amongst the poor people in those neighborhoods. They postulated this was because people were driven to extreme depression and stress due to keeping up with the jones. Anyway something to think about.
    Fulltimefinance recently posted…How and When to Rebalance your PortfolioMy Profile

    1. Thanks for the heads up – I had not read that. It does certainly fit in with this, though. Especially when you take into account that financial difficulties lead to an increased risk of suicide. The people in your study most likely to commit suicide are the people that are susceptible to the most drastic consequences of keeping up with the Joneses and the financial problems that come along with that.

      Thanks for the comment!
      Matt recently posted…One Tax Season Tip to Save $9,000My Profile

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