Someone who wins millions in the lottery who isn’t used to having and managing millions doesn’t consider the opportunity costs of the lost future value if they were to invest some of the winnings. They only consider the present value of the money and their short time preferences like food, drink, clothes, car, fun, sex, prestige, popularity etc. They prefer, value those things in the present more than they value the future value of the money.
It’s said in economics that a rational decision is one in which the benefits to the decision maker are subjectively considered to be greater than the costs. For example, when you buy milk, you look at the price and subjectively determine if the value of the milk is worth the price to you. If it is then it’s a rational economic decision to trade the money for the milk. An irrational decision is one in which the costs to the decision maker are subjectively considered to be greater than the benefits, which would make the decision self-destructive. For example, someone under the influence of drugs, alcohol or some other addiction might decide that it’s a good idea to withdraw all their savings and go on a week long binge to Las Vegas without telling anyone.
Wages are determined by productivity, the more productive you are, the more a company is going to be willing to pay you. But there are costs associated with acquiring those wages, you must invest your time, your education, your experience and you must sacrifice all other opportunities to do so. So when you buy milk, you’re really deciding whether you value the milk more than the time, education and experience you had to trade for the money to buy it. If you determine the milk is not worth the costs then you won’t make the trade even though milk might be a necessity.
When someone wins the lottery, the costs of acquiring millions are relatively zero. In other words, relatively speaking you didn’t have to invest anything to acquire the money and there is so much money that you don’t have to sacrifice any other opportunities in the present, you can have it all. If the costs are zero in your cost-benefit analysis, then it is a rational decision to make the trade for anything you value because the benefits will always outweigh the costs.
For example, say you want/need a new car, you will weigh the costs of how long it took you to save the money, all the things you went without or how long and how much you’ll have to pay the car loan against your subjective valuation of the car. If you win the lottery, those costs don’t exist and the benefits immediately outweigh the costs, you’ll buy the car. That goes for everything, if you like looking at women take their clothes off in a strip club the benefits outweigh the costs. If you like eating out every night, the benefits outweigh the costs. If you like seeing the looks on people’s faces when you buy a round at the bar you’ll buy a round at the bar. All perfectly rational economic decisions given the circumstances and it’s exactly what historical experience has shown us will happen.
This economic analysis applies equally to any situation in which the decision maker was given wealth they didn’t earn, like government welfare of any kind, personal or corporate. When corporations are subsidized by the state it’s like winning the lottery, they are given millions to do with as they please. In 2008 the Obama administration gave banks billions of dollars and many of them used that money to give their CEOs bonuses and lavish golden parachute retirement packages. Things they wouldn’t have been so quick to do with their investor’s money but since it was free, it made perfect economic sense. Personal welfare recipients also make what would otherwise be considered reckless decisions like buying cigarettes, alcohol, lottery tickets and drugs, ‘Booze and Butts’ is what it’s called. Every welfare payday the grocery stores are overrun with those receiving money from the state and they buy things that wouldn’t necessarily be in their budget if they worked for a living and had to earn the money. Ironically, the ‘war on poverty’ keeps people poor for this very reason.
The Federal Reserve Banking System allows banks to create money out of thin air to loan out and since the money doesn’t have to be earned, the costs of the loans to the banks, like the lottery winner, are zero. Ever wonder why you received all those ‘pre-approved’ credit card applications as a senior in college even though you hadn’t graduated yet with your degree in sociology and had absolutely no job prospects? How could the banks be so reckless with their depositor’s money as to risk it on tens of millions of college kids? They weren’t risking their depositor’s money, every time someone swipes a credit card new money is created out of thin air by the issuing bank. The bank doesn’t have to have the money on hand in order to loan money out so they loan it to any and everyone who wants it. That was the triggering mechanism to the 2007-2008 meltdown of the housing market that led to the great recession. Banks were loaning people money for two, three homes even if they were unemployed and had no or bad credit.
The Federal Reserve also creates money out of thin air and loans it to the federal government and other governments around the world but since the government can borrow as much as they want, even to pay back previous loans, the money is free, just like for the lottery winner, so politicians spend it on whatever they want. Governments are notorious for wasting money on the bridge to nowhere, the $100 hammer, unused plane tickets, rent on office space that lays empty, corporate subsidies to companies that go bankrupt, political offices with popcorn machines, hot tubes and large screen TVs to name a few. Things they wouldn’t be able to do in the absence of a central bank with a printing press. No doubt the reason for the ‘Federal Reserve Act’ of 1913 creating a limitless credit card for themselves.
Regardless the source of the free money, history clearly demonstrates the rational economic outcome is preordained: the money will be wasted.