Jackpot! Why Winning the Lottery Won’t Change Our Data

Jackpot! Why Winning the Lottery Won’t Change Our Data

When someone wins the lottery, the income-level demographic data for where they live will be effected. However, depending on the way you look at this effect, there will either be slight changes, if any, or there will be a large change. The reason for this difference is that demographic datasets supply both mean and median household incomes.LottreryBalls_Clipped

Lottery winners provide us with a great example of why we run median household income rather than average household income. This is because using a mean generally works well for data with normal distributions while medians are generally used on data with skewed distributions. And as you can probably guess, income data is quite the skewed dataset. Since a mean is so heavily influenced by outliers, we use a median. The median value will provide the value in the middle of the data (when sorted in ascending order).

To illustrate this, let’s pretend that one lottery winner’s home ZIP code has 10,000 people. Let’s also pretend that, by some kind of freak chance, every one of these people has an income of exactly $50,000. That would mean that that ZIP code has an average and median household income of $50,000. But, the lottery winner has now changed that. With their income changing from $50,000 to somewhere around $500,000,000, the new mean household income would be $99,995 and the median income would remain $50,000.

When the lottery winner cashes in their big ticket they will be skewing the living daylights out of the income datasets for the areas they live in. Let's say, hypothetically, one big winner was from Munford, Tennesee (Just north of Memphis and a few hours to the west of Stratasan's Nashville office). Let's apply what we just did with our hypothetical ZIP code in the last paragraph to provide a rough estimate of how the income data in Munford will change. In 2015, ZIP code 38058 (The only Munford ZIP code) had 9,845 households, a mean household income of $72,659, and a median household income of $58,708. After factoring the lottery winner, the same ZIP code would have an updated mean household income of $123,438.82 while the median income would have little or no change. By winning the lottery, Munford's winner added $50,779 to the mean income! That's a whole lot of change considering it only affected 1/9,845 households!

At Stratasan, we use median household income as the preferred method of examining wealth in our various analyses. Because winning the lottery is great, but that kind of an event having a huge effect on your data is not.

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