The windfall effect
Behavioral economists have observed the impact a sudden influx of cash could have on a person’s spending habits and their ability to make risky decisions. “We find a clear and systematic pattern that windfall gains increase risk tolerance,” says a study published in the Journal of Risk and Uncertainty last year.
Put simply, a quick and sudden increase in your spending power could prompt you to abandon the financial guardrails that have protected you from reckless spending.
Nearly three quarters of Americans (72%) lack the financial confidence needed to manage a large influx of money on their own, according to a Citizens survey.
Being aware of the windfall effect could perhaps help you tackle it. But the next step could be to harness this effect to do some good for others and show your appreciation.
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Learn moreUsing your windfall for good
Since a windfall of cash has the potential to eliminate your budget and spending barriers, you could harness this newfound freedom for good. For instance, selling Broadcast.com to Yahoo! In 1999 turned Cuban into a billionaire. He admits that some of this cash influx was spent on a private jet. However, this lack of spending restraint also enabled him to deliver seven-figure bonuses to employees of the firm.
Similarly, Swift’s “Eras” Tour generated $1.039 billion in ticket sales during 2023, according to Pollstar. We can assume this success enabled her to exceed the typical trucker bonus of $5,000 to $10,000 and deliver $100,000 to each driver.
You might never sell a tech firm or fill stadiums, but if you receive a windfall through an inheritance or lottery or bonus you could use that cash to do things that were previously considered either unconventional or impossible. For instance, paying off a relative’s student loans or helping your mother pay off her mortgage.
Indeed, 33% of Americans said they would use a windfall to finance a family member’s education, while 34% said they would use it to start a new business, according to Citizens.
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