Topic for Jan. 25. (Thur)

[Alex !]

Lottery results in happiness levels

We surveyed a large sample of Swedish lottery players about their psychological well-being 5–22 years after a major lottery event and analysed the data following pre-registered procedures. Relative to matched controls, large-prize winners experience sustained increases in overall life satisfaction that persist for over a decade and show no evidence of dissipating over time.

The estimated treatment effects on happiness and mental health are significantly smaller. Follow-up analyses of domain-specific aspects of life satisfaction implicate financial life satisfaction as an important mediator for the long-run increase in overall life satisfaction.

Observational studies consistently find that happiness, life satisfaction, and other facets of well-being are positively correlated with wealth and income.

However, the extent to which these associations arise due to causal pathways from wealth to well-being remains poorly understood.

Moreover, a large literature on hedonic adaptation argues that people adjust their aspirations upwards when their economic conditions improve, implying the long-term effect of positive economic shocks may be smaller than the short-term effect. Considerable uncertainty therefore remains about the magnitude as well as the persistence of any income or wealth effects on subjective well-being.

A better understanding of how wealth and income impact long-run well-being is important for both societal and individual priorities. At the individual level, people may exaggerate the importance of financial conditions for well-being.

Estimates of the effect of wealth may therefore help people make more accurate tradeoffs between pecuniary and non-pecuniary aspects of life. At the societal level, subjective well-being data are increasingly used in welfare analysis.

For instance, estimates of wealth effects may prove valuable in cost–benefit analyses that rely on subjective well-being data to elicit willingness-to-pay for non-market goods, and when deciding on pecuniary compensations for non-financial losses.

We find that the long-run effects of wealth vary depending on the exact dimension of well-being.2There is clear evidence that wealth improves people’s eval‎uations of their lives as a whole. According to our estimate, an after-tax prize of $100,000 improves life satisfaction by 0.037 standard deviation units. 

For happiness and mental health, our rescaled estimates are about one-third the magnitude of the corresponding gradients estimated in cross-sectional data. For life satisfaction, we find that our rescaled estimate is similar in magnitude to the income gradient.

We also compare our main results to those reported in previous quasi-experimental studies of lottery players’ well-being and show that our study compares favourably both in terms of statistical power and the credibility of our causal inference.

Large-prize winners spend down their windfalls, but lottery wealth dissipates slowly and is robustly detectable for well over a decade after the win. Winners also reduce their labour supply, yet the reductions are modest, do not seem to depend on the type of prize (lump-sum or monthly instalments), and spread out quite evenly over the entire time horizon for which we have post-lottery outcomes. Winners also invest a substantial share of the wealth in financial assets, often opting for low-risk bond products over equities.

A key question is whether absolute or relative economic conditions are more important determinants of well-being. Since a lottery prize causes both relative and absolute wealth to increase, it is not clear that our results are relevant for resolving the controversy.

Second, even though the demographic characteristics of individuals in our Respondents Sample are overall similar to a representative sample of Swedish adults, lottery players may differ along unobserved dimensions in ways that limit the generalizability of our findings, especially in settings outside Sweden or very narrowly defined subsamples.

Finally, previous research has found that financial distress and negative wealth shocks can have substantial adverse effects on well-being. Since all lottery prizes induce positive changes in wealth. Our data do not allow us to explore the intriguing possibility that the effects of negative and positive wealth shocks are asymmetric.