Powerball, Happiness and Spending

Powerball

The first week of 2016 has presented us with two very different financial stories, both of which were record-setting in their own way. The stock market had its worst opening week ever, and the multi-state Powerball lottery looks to sport the largest jackpot in history, with what should be a $1.3 billion payoff if someone wins on Wednesday, January 13th.

Let’s dispense with the market stuff now, since that’s actually the least interesting of the two stories. Most readers of this blog can probably predict what we might say:

  • The long-term trend of the market has been – and will continue to be – upward.
  • That upward trend has been – and will continue to be – punctuated with periods of volatility.
  • The biggest threat to long-term financial success has been – and will continue to be – an emotionally-driven response to short-term events.
  • In the face of volatility and market declines, our philosophy and resulting advice has been – and will continue to be – to keep calm and stay the course.

On to Powerball!

As of January 9th, people had purchased over $1 billion worth of tickets, despite the fact that their odds of winning were 1 in 292 million. To put that in perspective, you would have a greater chance of being killed by a lightning strike (1 in 164,968); die by drowning (1 in 1,113); being struck by lightning, while drowning (1 in 183 million); or, in keeping up with Star Wars mania, successfully navigating an asteroid field (3,720 to 1).

You can take that information in 1 of 2 ways. You can be Han Solo (“Never tell me the odds!”), or you can come to the conclusion reached by the computer in 1983’s War Games after it’s run through all the potential outcomes of a global thermonuclear war between the US and the former Soviet Union (“Strange game. The only winning move is not to play.”).

Personally, I lean towards the latter. But Powerball and other lottery jackpots offer a fascinating look into human psychology when it comes to large and sudden sums of money. Historically, lottery winners haven’t fared all that well. Faced with requests from long-lost “family” members, strangers with can’t-miss investment opportunities, or just straight-up criminals, many winners wind end up no better than before they won, and in some cases much worse.

What’s more, the prospect of a huge windfall uncovers some interesting things about how most of us think about money and how we incorrectly associate money and happiness. In 2011, as part of a story about whether winning the lottery guaranteed happiness, CNN reported on research from Elizabeth Dunn and Michael Norton that eventually ended up in their book Happy Money: The Science of Happier Spending. In the book’s introduction, the authors shared some online comments that readers posted on the CNN website after the story appeared, where the commenters described what they might do if they won the lottery. More often than not, these aspirational lottery players centered on two themes: buying lots of stuff and spending the money mostly on themselves.

Dunn and Norton’s research suggests that people would be much happier if they did the exact opposite, namely buying experiences instead of things, and spending money on others.  In their book, they also lay out three other principles that their research indicates increase happiness as it relates to money and spending:

  • Make it a treat: rather than indulging on our favorite things simply because we have the resources to do so, making things “special” increases our enjoyment of those things
  • Buy time: using money to basically “outsource” things we’d rather not do frees us up to pursue activities that bring us much more happiness and fulfillment
  • Pay now, consume later: delayed gratification appears to increase our perception of how much we enjoy things. Half the fun is in the anticipation

While Woodward Financial Advisors may not advocate playing the Powerball lottery or provide you with the winning numbers, we can suggest that folks take a moment to think about how their own happiness might be improved with changes in their spending habits. That might not be worth $1.3 billion, but its close.

About Ben Birken

Follow me on Twitter: @WFA_Ben
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