Surviving the lottery

17th September, 2005

Dear Economist,

I recently won more than €100m on the lottery. I am terrified that the money will come between me and my friends, or that I shall make a mess of spending it. What should I do?

Anonymous of Limerick, Ireland

Dear Anonymous,

Don’t worry about your friends. Even if things don’t work out, with €100m in the bank you will not have any trouble making new ones. Still, you are right to be concerned about managing your win correctly.

If you were a rational economic agent, you would instantly optimise your purchasing patterns to deal with your greatly expanded budget constraint. Evidently you are not, or you would certainly not have wasted money on a lottery ticket, which gave you a tiny chance of winning a prize that you now say you do not want.

Economic psychologists have long realised that people do violate the axioms of economic theory. The economist John List has demonstrated, however, that these mistakes typically happen in unfamiliar settings. With experience, people do act rationally.

Therefore you must acquire this experience. I recommend putting your money in trust with binding rules on when you can withdraw it. The first year, allow yourself €50,000; this should relieve immediate money worries and provide yourself, and these precious friends of yours, with a few treats. After this practice, allow yourself €100,000 in the second year and €200,000 in the third. After 11 years you will have withdrawn all the money, and you should have had plenty of time to think about how best to spend it. You will have acquired newer, richer friends and you may even have kept some of your old ones. But before you become too expert with your money, kindly note that my commission on this advice is a modest 1 per cent.

Continued on

Update: Subscription-free in the New York Times again, so I’ve added the full text here.

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