Why do lottery winners go bankrupt?

This series is adapted, with permission, from a Chinese-language series by our friend Marcus Ji, who looks at historical events through an economic lens. We have condensed and adapted the original for an international audience.

According to data cited by the US Certified Financial Planner Board, roughly a third of lottery winners eventually declare bankruptcy – most of them three to five years after winning. A peer-reviewed study of nearly 35,000 winners in Florida (Hankins, Hoekstra and Skiba, 2011) sharpened the finding into something stranger: medium-sized windfalls do not prevent bankruptcy, they merely postpone it – and three to five years out, the bigger winners were going bankrupt at higher rates than the small ones. The researchers’ explanation was blunt: the money did not change how these people spent. It only amplified it.

Why would a life-changing sum of money change nothing? Two stories – one from a 1925 American novel, one from a Chinese general in 206 BC – show the machine at work, and why it runs, reliably, towards bankruptcy.

The man who threw parties for one person

Jay Gatsby is the central character of F. Scott Fitzgerald’s The Great Gatsby, probably the most famous American novel ever written. He starts life as James Gatz, a poor farm boy from North Dakota. As a young officer with no money, he falls in love with Daisy, a girl from a wealthy family. He loses her. She marries Tom Buchanan, whose family has been rich for generations.

Five years later Gatsby reappears, suddenly and enormously rich from selling illegal liquor during Prohibition. He buys a mansion on Long Island directly across the bay from Daisy’s house, fills the garage with a yellow Rolls-Royce, imports tailored shirts from England by the dozen, and throws colossal parties every week, open to hundreds of strangers. The purpose of all of it is a single person: he is waiting for Daisy to wander in, and to see what he has become. Gatsby himself barely drinks and rarely joins his own parties. He stands at the edge of the crowd, looking across the water at the green light on her dock.

The parties, in other words, are not entertainment. They are a broadcasting station – and every element of his fortune has been converted into transmission power.

Why people spend on luxury goods

In 1899, the economist Thorstein Veblen noticed that luxury goods – champagne, jewellery, designer clothing, prestige cars – break the basic law of demand: raise the price and, within limits, more people want them. His explanation was that for these goods, the high price is the point. What the buyer is really purchasing is the message the price sends to other people: I can afford this. Economists still call them Veblen goods, and the act of buying to be noticed is called conspicuous consumption.

Gatsby’s shirts, mansion and parties are Veblen goods, deployed at maximum volume. But there is a catch. The message only works if the audience perceives it the way the buyer intends. Tom Buchanan sees through him at a glance, not because he bought the wrong shirts, but because Gatsby shows them off too deliberately. People born into money spend it casually, without thinking; they have done it all their lives. People new to money spend it to be noticed, and the effort shows. Modern research confirms what Fitzgerald sensed: the deepest driver of this kind of spending is not the desire to be superior, but anxiety about not being enough. Gatsby spends to quiet an unease, not to celebrate a victory.

Note one property of this kind of spending, because it matters for the bankruptcy question later: a signal is not an asset. A house still shelters you next year. A party works only once – to keep the message alive, you must throw another one next week.

What Gatsby was really buying

Look closer at what Gatsby is trying to buy, and it is not status in general. Remember why his fortune exists at all: Daisy rejected him because he was poor. To Gatsby, her choice of Tom was a verdict – it said Gatsby was not worth choosing. So the mansion and the parties are not aimed at poverty. They are aimed at overturning that verdict.

Psychologists call this pattern compensatory consumption: when a person’s worth is denied in one specific area, they over-spend in exactly that area, trying to repair the damaged self-image. It explains something otherwise puzzling about windfall behaviour – why the money so often goes towards display rather than security. The spender is not managing wealth. He is answering, over and over, a person or a moment that once said you are not enough.

The general who won an empire and went home

Twenty-one centuries before Gatsby, a Chinese general faced the same choice – security or recognition – with an empire on the table.

In 206 BC, the general Xiang Yu destroyed the Qin dynasty – the empire that had unified China – and stood, for a moment, as the most powerful man in the land. His adviser urged him to make his capital in Guanzhong, the region he had just conquered. The advice made sense – Guanzhong was the strategic prize of the age: a vast fertile plain enclosed by mountains, entered only through a handful of defensible passes. It was the base from which the Qin had conquered everyone else. 

Xiang Yu refused, and gave a reason still taught to Chinese schoolchildren: “To be rich and honoured and not return home is like walking through the night in embroidered robes – who would see it?“ He marched his army back east to his home region, to be seen in triumph by the people he had grown up among. His rival Liu Bang promptly took Guanzhong, used it exactly as the adviser had suggested and ground Xiang Yu down. Four years later, defeated, Xiang Yu cut his own throat by the Wu river, saying he was too ashamed to face the elders of his home country.

Strip away the armies, and the structure is precisely the lottery winner’s. Xiang Yu had just won history’s largest jackpot. He faced a choice between the asset that secures the future (Guanzhong) and the purchase that delivers recognition (the homecoming) – and he spent the jackpot on being seen. The people of his hometown bracketed his whole life: at his peak, he craved their attention; at his death, he could not face them in defeat. Their recognition was, from beginning to end, the currency he was actually accumulating. Everything else – including the empire – was spent to obtain it.

How Gatsby tried to become “Rich”

There is one more twist in Gatsby’s case. Prohibition was a law rigged in favour of the rich – they kept drinking legally while people like James Gatz were the ones policed. So when Gatsby gained wealth selling the alcohol this law pretended to ban, he was defiant. His accomplishments carried a message: “I beat you at the game you rigged against people like me, and now I’m burning the winnings in front of you.“

He then spent the money trying to get into the very class he had defied, by copying their lifestyle – their shirts, their cars, their kind of parties. But every purchase he made didn’t get him closer to fitting in, only quietly confirmed that their way of living was better. Sociologists have found that conspicuous consumption rarely works as a means of class ascent, nor does it bring any genuine accumulation of social capital. It is merely an expensive ceremony paying tribute to the old rules.

Why the money always runs out

With all three motives in view, the path to bankruptcy stops being mysterious. Spending aimed at being seen has three properties that ordinary spending does not.

First, it buys a consumable, not an asset. Attention evaporates. The party must recur, the car must be replaced by a newer one, the signal must keep firing – so the spending is structural, not one-off, while nothing accumulates on the other side of the ledger.

Second, the audience owns the scoreboard, and the scoreboard moves. The sociologist Pierre Bourdieu documented how elites continually redefine what counts as taste, precisely so that newcomers who have just bought the entry ticket discover the door has moved. Spending to impress a reference group is therefore an arms race against a referee who keeps raising the bar.

Third, the driver is anxiety, so there is no finish line. The unease the spending is meant to quiet returns faster than the signal can quiet it. Gatsby’s parties can never stop, because stopping would mean facing the question: without them, what is left?

Recurring costs, a rising bar, and no stopping condition: Regardless of how much money you have, you’ll inevitably run out. That is why the Florida study found that windfalls don’t prevent bankruptcy, they merely postpone it. Bigger winners fared worse as a bigger jackpot simply builds a bigger transmitter, with bigger running costs, and buys a few more years of broadcast before the same silence. The money runs out in three to five years because it was never being used as capital. It was being burned as fuel.

Three motives, one flaw

The whole machine, at a glance:

All three run at once, and none can deliver what it promises. Each one hands the power to decide “am I enough?” to an external party – other people’s eyes, an old judgment, someone else’s rulebook.

The everyday version

Shrink the scale and the machine is easy to spot without a mansion: 

• When the bonus lands, the first purchase you make is to show off towards someone who once looked down at you.
• When the promotion arrives, you start going to a more expensive restaurant to match your new status.  
• When the investment pays off, you buy a luxury car to get noticed, ignoring the debts you previously had.

The sums are smaller; the mechanism is identical – and modern products industrialise it. Social media feeds the trigger. Studies find passive scrolling raises conspicuous consumption urges through the feeling of I should have that too. Buy-now-pay-later schemes are engineered to separate the pain of paying from the pleasure of owning. Users spend measurably more, and merchants see order values jump 20–40%.

One test cuts through most of it: if nobody would ever know I bought this, would I still buy it? If the answer is no, the money is buying other people’s gaze. Buying it anyway is a legitimate choice – but knowing what you are paying for should come first.

The only question that matters

Xiang Yu’s embroidered robes and Gatsby’s shirts are the same garment, two thousand years apart. What breaks the cycle is not a bigger jackpot. It is taking back the authority to decide what you are worth. That is harder than getting rich, and worth more than any party.

Previously in this series: If money isn’t what you own, what is it?

Next in this series: How to not fall for a Madoff-style Ponzi scheme?