Sudden Wealth Syndrome: The Great Destroyer of Prosperity

By Lewis Humphries | February 23, 2012 AAA
Sudden Wealth Syndrome: The Great Destroyer of Prosperity

The beginning of this month saw Facebook finally take its first steps as a public company, as part of the social media giant's desire to raise a total of $5 billion in financial funding. While this will undoubtedly boost the organization's revenue and create a vast resource of capital for investment, it is also set to make millionaires out of numerous individuals associated with the firm. Though at first glance this may seem to be a positive and life changing event for the beneficiaries, there is intense speculation concerning their ability to adapt and whether they may become susceptible to the perils of sudden wealth syndrome (SWS).

SEE: Stock Basics

Wealth Creation in 2012: Where Are all the Millionaires?
The transition of Facebook into a public company confirms social media as the latest purveyor of wealth creation, while also establishing a new generation of cash rich millionaires. Given that social gaming giant Zynga and Groupon Inc. have both made their own public market debuts during the last financial quarter, it is little wonder that terms like sudden wealth syndrome are now re-entering the commercial domain. With new social media resources like Pinterest also growing at a rapid rate of progression, it is likely to become even more widely used during the next 12 months and beyond. (For related reading, see 4 Companies Behind The Social Media Curtain.)

It should be remembered however that public companies are not the only creators of instant wealth, and the U.S. lottery has distributed millions of dollars in prizes across 42 individual states. In fact, the statistics suggest that even the poorest U.S. citizens are only too keen to chase their dreams of wealth and fortune through gaming. Studies reveal that households with an annual income of less than $13,000 spend an estimated 9% of this total on lottery tickets each year. Households that earn more than $300,000 spend a mere 0.3% of this sum on the lottery in comparison, so it is fair to suggest that individuals on low income are themselves becoming increasingly impatient in the pursuit of financial wealth.

The Most Notable Instances of Sudden Wealth Syndrome
Lotteries across the globe have created numerous cases of SWS, and across a range of social demographics. The most famous of these concerned West Virginia building contractor Andrew Jackson "Jack" Whittaker Junior, who is estimated to have lost a staggering $114 million in just 4 years after winning the Powerball multi-state lottery in December 2002. At the time of winning his $315 million prize, he was a successful businessman with a well-rounded and closely knit family. After investing his money in a series of eclectic and poorly considered purchases, however, his life spiraled downwards in a cycle of death and addiction until he was left with no fortune or family to speak of.

It stands to reason that SWS should be an even greater issue for younger beneficiaries, and this brings into focus the relatively early age at which individuals across the globe can gamble on lottery games. In the U.K., citizens can play lottery games if they are aged 16 or over, and this ruling allowed 16 year old Callie Rogers to claim a jackpot prize of £1.9 million in 2003. Unequipped either emotionally or educationally to handle her windfall, she has only recently recovered from a cocaine addiction and repeated suicide attempts having wasted all but £100,000 of her fortune. (For additional reading, see Winning The Jackpot: Dream Or Financial Nightmare?)

Does Education Hold the Key to Coping with Sudden Wealth Syndrome?
As these two stories demonstrate, SWS can afflict people regardless of their age, circumstances or geographic location. While there appears to be no core demographic that is at risk, there are two major factors that trigger SWS once beneficiaries have received a vast sum of money. The first is emotion, and more specifically how the creation of sudden wealth evokes intense feelings and a series of emotive reactions. Whether this wealth is the result of an inheritance, lottery success or innovative commercial practice, these high levels of emotion can cloud each beneficiary's thought and decision making processes.

This does not explain the continual downward spiral experienced through SWS however, which in the case of Andrew Jackson "Jack" Whittaker Junior, alone, continued for nearly four years. A prolonged inability to manage wealth suggests that there are more fundamental educational issues that need to be addressed, especially with regards to basic economics and the ability to budget any sum of cash effectively. Studies conducted by research group TNS in 2010 supported this notion, as it was revealed that just 13% of Canadian citizens were able to answer three basic risk literacy questions and understand the core principals of financial risk.

The Bottom Line
Although there are an increasing number of professional organizations that offer guidance to those at risk of sudden wealth syndrome in the U.S., it would appear that a fundamental lack of financial education will be a more difficult issue to resolve. With specific financial subjects such as economics and budgeting absent from the high school curriculums, young adults have been thrust into an increasingly impatient society with an inability to manage their resources or identify significant aspects of financial risk. This meeting of impulsive desire and inadequate education is a recipe for disaster, and ensures that sudden risk syndrome is very much alive and well in 2012. (To learn more about financial risk, check out Risk Tolerance Only Tells Half The Story.)

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