Tuesday, October 22, 2013

The Cherokee Land Lottery: What Happens When You Randomize Wealth

Cherokee Land Lottery: What Happens When You Randomize Wealth
Back in August I wrote a post on Give Directly, a charity that simply gives money to poor people, and it sparked one of the better debates on the blog. CashRebel recently wrote a post on the subject as well, and he specifically asks whether such a program would work here in the United States. Would simply providing wealth to American familes have long term positive results? Would the lives of those families improve?

As interesting as these questions are, they are a bit academic. It makes for good debate, but how do you get data? Because even if you could give life-changing sums of wealth to people here in this country, it would take decades to see the long term impacts of that charity. Maybe generations. Wouldn't it be great if someone had performed a natural experiment about randomized wealth a long time ago, here, in this country? Well, thanks to an idea of Georgia politicians in the 1830s, an article by economic professors Hoyt Bleakley at the University of Chicago and Joseph Ferrie at Northwestern, and the excellent podcast from Freakonomics, we get to learn of a quirky and sad bit of American history. (And if you have thirty minutes, I definitely recommend listening to the podcast.) Their work reveals what happened when a huge sum of wealth was randomly distributed in the Cherokee Land Lottery.

The Natural Experiment:
Because of a previous scandal in Georgia, in the 1830's the state's politicians were under extreme pressure from citizens. To quell public pressure, politicians decided to distribute the land that was tragically taken from the Cherokee people (and led to the the Trail of Tears), via a series of lotteries. If you were a white male who had lived in Georgia for three years or more and were over 18, you were eligible to buy one ticket for 12.5 cents: one "draw" per man maximum. (Some other groups, such as widows, orphans, or veterans, received two draws.) Winners of the lottery would receive 160 acres of land, worth approximately $700 at the time (equivalent to 900 days' wages for an unskilled laborer). This amount of wealth was roughly equal to the median wealth of residents of the time. Winning meant that the even the poorest Georgians would immediately have the wealth of an average citizen: a huge jump up the socioeconomic ladder. The payout was so good that there was near universal participation: the economists estimate that between 97.2% and 99.5% of eligible residents participated in the lottery. And the lottery was no real long-shot: roughly 19%, one in five, participants won. With a twelve cent ticket giving a 19% chance of winning $700 of land (worth nearly three years of wages), residents had every incentive to participate.

This sort of organic randomization, a natural experiment, basically never happens in real life. And it happens to address a great question for economists and policy makers as well: is the lack of wealth a barrier to investing in your family's human capital (e.g. - sending them to school, improving their future prospects, etc.)? Finally, because the first US Census was held relatively soon afterwards in 1850, the lottery winners and their children could be tracked. Researchers could use the data from this experiment, along with census data, to see the long term impact from this sudden impact of wealth on families. The Cherokee Land Lottery, while a tragedy for the Native Americans and a blemish on our history, was a windfall for these economists.

The Results:
So, what happened? Did the families benefit over the years? Did their children have greater wealth, income, school attendance, or literacy? It turns out, no. Amazingly, there was no long term benefit in terms of human capital, wealth, or income. From the paper:
"Although winners had slightly more children than non-winners, they did not send them to school more. Sons of winners have no better adult outcomes (wealth, income, literacy) than the sons of non-winners, and winners’ grandchildren do not have higher literacy or school attendance than non-winners’ grandchildren."
Depressing, right? The families who won this once-in-a-lifetime windfall of wealth, did not see any long term benefit. This is a period where Americans were actually sending their children to school. And the common wisdom is that poverty is an impediment to that: the poor don't have access to education (or equivalent education) because they don't have the means. Additionally, people who were literate did make more money: so there was an incentive to send children to school. But, in this setting, a shock of wealth did not have any snowball effect. The lottery winners' children were no better off than non-winners'.

The Conclusions:
A first objection is that giving land is not the same thing as giving cash. Give Directly provides cash, not acres of land. But it should be noted that back in the 1830's, the typical investment outlets for our capital (stocks, mutual funds, REITs, etc.) did not exist yet. The measures of wealth at the time in rural Georgia were land and slaves. So providing land seems to be a reasonable equivalent of providing wealth.

As this experiment didn't result in any long term benefits for the recipients of sudden wealth, what lessons can we take from it? The authors find that results are in line with what we'd expect today. They note that we can see the same general result with lottery winners: there are typically not long term benefits from a sudden injection of wealth. Within a matter of years, the money is gone and the families (and often the recipients themselves) are no better for having won (and are often worse off). (Though it should be noted that modern lotteries have a negative expected value, while the Cherokee Land Lottery had a very positive expected value.)

The study suggests that the disadvantages for children in poor households don't seem to simply be the direct result of a lack of capital. This authors argue that money, in particular, just being given to the fathers and mothers in poor households, isn't likely to be what the poor need. Something is needed, but a sudden influx of cash alone is not it. Based on this evidence, the simple act of giving money to poor people isn't likely to be the answer. There are likely cultural and socioeconomic issues in play that are far too complex to be solved by simply throwing money at them. The poor might indeed need capital, but there needs to be something else (likely a lot of somethings) paired with it. (As readers of the blog will recognize, this is what Mrs. Done by Forty argued all along. As usual, the lesson seems to be that I should not disagree with my wife.)

In closing, Hoyt Bleakley describes the potential takeaways for our current society. From the podcast:
"When you select a particular group of the population, and you either give them money or you cajole them to get a little more schooling by bribing them, with a cash transfer or cell phone minutes or what have you, you have to ask whether there's some other set of characteristics that they have that makes it hard for them to take advantage of those opportunities. And maybe there's an intervention that helps them better manage those other characteristics; that makes it such that that's less of a disadvantage for them. Whereas giving them something, you say, 'Well this was great for me; it will be great for you,'...that's perhaps not the right approach."
I don't know about you, but I find the whole thing to be interesting, but kind of a downer. Sorry for the depressing post, today. But what do you think of the study? Do you believe that the authors are wrong, and that an influx of cash via charities like Give Directly would have long term positive impacts?


*Photo, possibly of a Cherokee land rush claim, is from rcstanley at Flickr Creative Commons.

42 comments:

  1. It is very interesting and there are a lot of implications for how we help the poor today. It's funny that the people WITH money can't wrap their heads around the fact that the poor will simply view money differently. To them it may represent an easier way to get through the next few months, while the rich will be wondering, why didn't they invest it? Pairing such a gift with education would be a start, but even that wouldn't be enough, I think, given the other factors that those people deal with on a daily basis.

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    1. Hi Nick,

      Education is usually the thing I first think of, as a former teacher. But I have a gut feeling that it's no silver bullet, either.

      I love your simple explanation that the poor and rich simply view money differently, and that alone might explain the different outcomes you see when each is provided a windfall.

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  2. Interesting study! I have to agree with Nick - some sort of education about how to handle all that money would be great, but I'm sure there are other factors to consider. I imagine it's a bit difficult to adapt after being in poverty for so long. That said, the results aren't too surprising given what happens to lottery winners, as you said. I think a lot of it has to do with being unprepared! Winning the lottery is such a far away dream to most of us, that while we hope it'll happen, we don't really think it will. Thus, we don't actually think about what we would do with all of that money and are more apt to make poor decisions (at least the average person, not us PF bloggers =) ).

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    1. Hi E.M.

      Sean had an interesting guest post on lottery winners today at Budget at the Beach -- funny how the stars line up like that sometime.

      Sometimes I wonder if we PF bloggers might end up making the same big mistakes if given a lump sum. We're good at managing streams of income but I wonder how we'd do with a lot on the line all at once. Like you noted, how prepared can one be for a situation that rarely ever comes to pass?

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  3. Very interesting. This actually reminds me of a documentary that I saw a number of years ago on a totally different topic. The documentary followed a woman who was morbidly obese - like in 5-600 pound category. At the beginning of the story we meet "Christie" (don't know if that's her real name or not) who is a struggling single mother who just loves her young daughter to pieces but just needs help with her medical situation. So we get to follow her as she qualifies for various programs and finally gets bariatric surgery. The surgery is a stunning success and the pounds literally melt away. BUT... the thinner she gets, the more her dysfunction starts squirting out in other areas. By the time the film ends, she's abandoned her daughter and developed a severe drug and alcohol problem.

    I guess the moral of the story was that for Christie, at least, obesity was not really the problem - it was a symptom of a much deeper dysfunction. This study makes me wonder if the same doesn't hold true for endemic poverty, at least in some situations.

    It's sort of a depressing thought, and one that lends itself way too easily to a "blame the victim" mentality. But it does make you wonder where the line is between symptoms and outcomes.

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    1. Hi EcoCatLady,

      What an intriguing and sad story. Like you noted, sometimes the things we think of as problems are really symptoms. Root causes are hard to identify and harder to address.

      Thank you for the insightful comment.

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  4. Absolutely fascinating...I definitely find these topics of interest. Fighting poverty and changing someone's mindset is very difficult. It isn't something that merely throwing cash at will solve. Mayor Bloomberg in NYC tried a pilot program (privately funded) which paid poor families with kids for "good behavior" such as getting a library card, school attendance, going to the doctor. After 3 years, the program was stopped to mixed reviews. While they didn't say it was a complete failure, it doesn't seem like it was a success either...being that they stopped it. http://www.nytimes.com/2010/03/31/nyregion/31cash.html?_r=0

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    1. Thanks for sharing that article, Andrew. Bloomberg sounds like a bright guy with his heart in the right place. I love his quote at the end of the article:

      "'You always hope that you’ll come across a magic silver bullet, and you never do,' he said. 'If there were simple solutions, somebody would have found them a long time ago. And you make progress incrementally, particularly if you’re trying to focus on some of society’s biggest problems.'”

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  5. Very interesting, though I suppose it makes sense - I think Nick said it rather well, as well as Mrs. DbF in the past. I guess it goes with that give a person a fish vs. teach a person how to fish saying, yes?

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    1. Hi Anna,

      So true - that bible verse just doesn't get old, does it? The rub is trying to figure out how to teach the poor to fish for that money. Like Bloomberg says, if it were simple someone would have figured it out a long time ago.

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    2. The Bible? ;-)
      http://en.wiktionary.org/wiki/give_a_man_a_fish_and_you_feed_him_for_a_day._Teach_a_man_to_fish_and_you_feed_him_for_a_lifetime

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  6. This is really interesting. I keep going back and forth on the results (maybe because I don't want to see my faith in humanity die a little :P) but it does make sense. Whether it is land, money, a factory, whatever, wealth by itself doesn't quite help the person out. They have to have the knowledge and ability to utilize that wealth to help create more wealth.

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    1. Hi Micro,

      I agree: as much as I want to believe that simply providing the means to the disadvantaged is the answer, I know it can't be that simple.

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  7. I think free education, access to influential networks, and quality mentoring will always be more useful than an influx of cash.

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    1. Those are three great ideas, Stephanie. My new roommate and I were just having a debate today on the merits of free (higher) education. I suspect that mentoring might even be of more use.

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  8. Reminds me of the oregon medicaid experiment (another randomized distribution - but this of health insurance). Turns out the actual health results weren't actually all that different between the two groups, despite differences in self-reporting...

    http://www.npr.org/blogs/health/2013/05/01/180292446/second-thoughts-on-medicaid-from-oregons-unique-experiment

    So the recipients of the land grants probably felt much wealthier, even if they didn't act much wealthier...

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    1. That's an intriguing report, and timely given our expansion of Medicaid. The lower rates of depression for the group in Medicaid is particularly interesting: I wonder if simply having health coverage might reduce stress and one's chances of depression?

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    2. That was my take on the depression, though if stress was really that much lower I was surprised there wasn't a measurable decrease in hypertension, too.

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  9. Very interesting study! It seems that some people are simply not made to improve and take advantage of benefits as long as they are not educated or at least have an idea on how to make it work. When I had some extremely good months financially, I decided to give money to a poor family in the city where I live, but later I decided that I would do them more good simply buying them a few shopping carts full of food - money could easily be wasted on things that they don't need, especially alcohol, while food will certainly help them more. I haven't managed to find a family to help but one thing is clear: I should not give them money (even though what I can offer can't be compared with winning the lottery or getting some land :D)

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    1. Hi C,

      Good on you for helping out people in your community. It's a good approach you're taking: food is one of those things that is kind of incorruptible. It can only be used for good.

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  10. I wonder if the results might be different if you provided small amounts of money at regular intervals over time as oppose to one big lump sum all at once. Big sudden changes in status might be harder to handle than a gradual adjustment. Did they talk about that possibility at all?

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    1. Hi Matt,

      The authors didn't discuss that possibility but the Bloomberg program that Andrew notes above is something along the lines that you're describing (small payments for regular "good" activities). It didn't yield really positive results but there appear to be other problems with the program (too many variables...too complex).

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  11. I agree with E.M. that this compares to lottery winners today who are often no better off. I am a believer in the "give a a man a fish" proverb. You can be given a huge sum of money or tract of land, but unless you know how to use it properly, it can end up not helping you. A huge tract of land without access to the knowledge or the staff to make money with the land may have ensured they didn't do any better than their long-time landowner counterparts.

    Same goes for lottery winners... if they don't know the importance of hiring an accountant to help manage their huge sum of money so it doesn't get squandered, a lottery win can make them no better off.

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    1. That's now my thought as well, Tara. There's a part of me that wants to believe simply providing the means is a silver bullet. But it's a pipe dream.

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  12. "Something is needed, but a sudden influx of cash alone is not it." I agree what what you said here. I don't think handing out cash is the answer, but do agree it's a problem and something needs to be done. I have no idea what though. I would still like to test the lottery theory though on myself. :)

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    1. Ha! Me, too Tonya! If either of us win the lottery, we can split the winnings and perform a little experiment.

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  13. Super interesting article that sparked intense debate with my husband. There was much to our discussion, but we spent quite a bit of time on whether our belief that it makes zero sense to give poor people cash directly has to do more with their lack of skill/ability to leverage that cash into a greater outcome that can impact them long-term or whether they simply are too focused on the immediacy of their situation (bottom of the hierarchy of needs) to think about that investing that capital into something more.

    We settled on skill playing an enormous role in this conundrum based on the evidence that even lottery winners and celebrities who were not "poor" prior to winning massive amounts of cash end up scattering it to the wind rather than transforming it into something more.

    Note: I have formed my opinion that it is absolutely backwards to use cash a primary giving method for people in need on my experiences as a social worker. Every family I worked with that struggled long term financially spent any cash windfall on flat screen televisions and stereo systems. There is a culture among the chronically low income. Now I would and have given cash in a heartbeat to people down on their luck - got cancer, dad died in an accident, etc. There's a big difference in the perspective and abilities of these groups of people. The impact of cash is magnified by your beliefs and reality.

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    1. Emily,

      Thank you for the thoughtful response. I remember your comment from the previous post on Give Directly, and it's great to get the impressions from someone who's worked on the front lines, so to speak.

      I agree that the root cause is a bit of a conundrum: are the poor lacking the skills to handle money property, or are their circumstances (e.g. - I am hungry and my kids are sick) simply nudging them towards short term, sub-optimal choices? Or is there some other reason? The answer to that question is critical because any course of action ought to address what we believe the root cause(s) to be.

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  14. I think we would have to look at why a particular person is poor before just giving them money. With cutbacks on mental health, the nearest asylum to my location was shut down by Ronald Regan, many homeless people are deeply mentally disturbed. They wouldn't know what to do with extra money. Then there is the other side of the coin. I have a friend whose parents were immigrants from Cambodia. They got out when the killing fields massacre started. They had nothing when they got to America. They scrimped and saved and opened a little restaurant. They put their son (my friend) through college and he is now a programmer at Google, doing very well for himself. Nobody gave them money, but they knew that the American dream centered on education. And that's what they gave their son. Why some poor people see that, and others don't is beyond me.

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    1. Bryce, your examples might point to why Give Directly has success internationally. The situations of the impoverished in other cultures might, in larger proportions, simply be a lack of access to capital.

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  15. How can the poor be helped, really? Give them cash, it's easy come, easy go most of the time. Maybe not the same when land is given. Cash is like giving them fish and they are fed for a day. Land is like teaching them how to fish and they are fed for a lifetime. Can it work that way?

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    1. Hi Jen,

      I love that parable. I think the rub is how best to teach people to fish. There's evidence that financial literacy programs basically have no material impact.

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  16. Sometimes simply providing people with an influx of cash won't solve anything long-term. If someone is stuck in a cycle of poverty there usually is some other underlying issue or change needed than simply being handed cash.

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    1. Hi DC,
      I completely agree. I think that poverty might be a symptom of larger underlying issues, to which there is probably no simple answer. Like Bloomberg suggested, we may need to accept that incremental slow change is the only path forward.

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  17. Was gonna put the "give a man a fish" quote, but it looks like others have beat me to it.

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    1. Hi Lisa. Yeah, that verse is definitely the a good way to sum up the thoughts of a lot of commenters.

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  18. Great post, as usual. I've read a bit on the subject and would definitely agree with the research findings that explain why an infusion of cash won't solve "poor problems." There are many people in America who believe that giving cash or food or some other widget to those who are poor will greatly benefit that life. That somehow, that person will magically wake up and begin spending that new found cash wisely.

    No, it doesn't work like that. It's a multifaceted problem and usually that cash gift is squandered immediately. It's a tough situation on both ends....

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    1. Hi Jacob,

      I completely agree, though I wonder what the right approach is to the multifaceted issue. While cash isn't the answer I'd want to hear the strategies that have better impacts long term.

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  19. "You always hope that you’ll come across a magic silver bullet, and you never do,' he said. 'If there were simple solutions, somebody would have found them a long time ago. And you make progress incrementally, particularly if you’re trying to focus on some of society’s biggest problems."

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  20. That is an interesting story that I have ever read. I like some stories about lottery like this.

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  21. Really this is very cool story. I like story like this

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