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