I am pleased to report that I once again have a reason to put on a tie every day. I’ve signed on with an investment management start-up in Boston. Details are not relevant here, but bottom line is that my thinking hours are now consumed by commercial activity, to the exclusion of, among other amusements, this blog.

Of course, start-ups are fragile things. For all I know I’ll be back here by summer. Either way, I’m going to keep paying the (very small) fees involved in keeping this site up for those who find my old posts worth reading. Google still sends a steady stream of readers this way on daily basis so I guess some of you must still find this stuff of use.

Once again, to all my readers, loyal and otherwise, a heartfelt thanks for allowing a curmudgeon to ramble on a bit.

[Photo: Asa Wilson]

There is a movement amongst earnest policy wonks that might be called Nanny State Light. It’s a compromise position between full-on centrally  planned we-know-what’s-best-for-you control and you’re-on-your-own-kid libertarianism.

The idea is that instead of making people do the right thing or hoping that they do what’s best on their own, you give them a little nudge and hint in the right direction. This is, I am told, the topic of a clever and popular book, Nudge, which I haven’t yet gotten around to reading. (But I bought a copy a few weeks ago.  That’s something, isn’t it?)

The latest scheme along these lines to hit the media is in today’s Wall Street Journal. Apparently, all we need to do to get people to save more money is to send them a text message reminding them to save more money.

A new study by a group of economists looking at why people save money found that simply sending out cellphone reminders increased savings balances by 6%.

The study challenges the idea that people don’t have enough self-control to save. Instead, the problem may be that they just aren’t paying attention, said Dartmouth University economics professor Jonathan Zinman, one of the study’s four authors.

"Savings isn’t at the top of their mind," said Mr. Zinman. "Basically all we did was remind them."

Brilliant! So it turns out that all we need to reverse multiple decades of Americans saving less than other countries is systematically nag, I mean "remind" them to save. That’s a relief. I guess we just have a reminder shortage.

I had thought we saved less than other countries for other reasons.  Like because we have a hyper efficient retail system that delivers consumer goods more cheaply than anywhere else and that we don’t have a VAT tax on those goods.  We also have a peculiarly high level of home ownership, which tends to skew the numbers. And, of course, optimistic assumptions about future wealth is ingrained in the national character.

Oh, and one more thing I used to believe. I used to think that saving for retirement was confusing and scary and that most people who spent too much and saved too little did so because they didn’t know any better.  Come to think of it, I still believe this.

The nudge crowd loves to bring up the well documented phenomenon that if you make enrolling rather than not enrolling in a 401k the default for new employees, enrollment will go up.

I think that increasing 401k enrollment is basically a good thing and that this is a good policy, but let’s be honest about what is going on here. There is a group of consumers too ignorant, intimidated, confused, and/or lazy to change their 401k participation status. For their own good, we are rigging the system to get them to fall into the right choice. That’s better than the other way around, but we’re still ignoring the core problem.

Our money lives are very complicated and getting more so. A lot of us don’t really know what we are supposed to be doing. Nor is it easy to find out. Much of the available advice and instruction on money is unhelpful or just plain wrong. Text messages aren’t really much help here.

Nudging people in the right direction is probably, mostly, a good thing. But when it comes to the Personal Finance Problem, we need more than nudges. There are only so many simple topics to nudge on. And we quickly get into the problem of the nudgers not knowing the right answer either.

No, like it or not we have a you’re-on-your-own-kid society and little hints from nanny aren’t going to get us anywhere. What we need is a better way to teach the kids what to do.

[Photo: Remi Jouan]

We are coming up on what we Americans call the Holiday Season. And it is a season: not just one holiday, but a joyous period in which every day is special. A few of those days don’t have names yet, but I am sure that in time that gap in our culture will be filled. Here’s a rundown of the next week or so.

The traditional fun begins with Travel Nightmare Wednesday. Observed the day before the last Thursday in November, this holiday is celebrated around the nation by crowding into planes and spending quality time with loved ones inside cars crawling along interstates.

Then comes Thanksgiving, when we solemnly thank the Almighty for football and giant balloons in the shape of cartoon characters. Some families also give thanks that once again they deep fried the turkey without burning the house down.

Things pick up a bit with Black Friday, a holiday that celebrates the simple pleasures of buying stuff. Traditionally, it is observed by talking about how everybody else is going to the mall that day and recounting how it is traditionally the busiest shopping day of the year. It is not, nor has it ever been. That honor usually goes to Most Busy Saturday, which falls this year on December 18th.

Next up is Tryptophan Saturday. On this day we eat cold turkey sandwiches and decide we don’t like turkey nearly as much as we thought we did. It is named in honor of the amino acid that is traditionally thought to be the special ingredient in turkey which makes you sleepy. It’s actually no more prevalent in turkey than in chicken, beef, or pork. And eating turkey doesn’t make you sleepy.

Pretty Bad Travel Sunday follows.

And finally Cyber Monday arrives this year on November 29th. This is the day we do our shopping the modern American way: surfing the web on company time.

To cynics like me, the best part of holiday traditions is the total blindness we have about how traditional they actually are. If you are over 40 you know that Black Friday as a "holiday" was invented in the past decade or two. But I am sure that in another generation people will be quite sure it dates back at least to the Great Depression, if not the Pilgrims.

In fact, we seem to be in the habit of mistaking the relatively recently invented for ancient and the actually traditional for unwanted recent innovation. The President pardoning a live turkey? That dates all the way back to 1989. Complaints that the way we currently celebrate Christmas is crowding out the religious meaning of the day? Literally ancient, dating back to the Christian re-branding of pagan winter solstice holidays as Christmas.

Even our habit of believing that the newly created is old is itself a Christmas tradition of long standing. "A Visit from St. Nicholas" a.k.a. "The Night Before Christmas" (1823) convincingly described the whole St. Nick riding in a reindeer pulled sleigh and coming down the chimney thing as if it was a long standing legend, even though the poem pretty much invented the whole thing from scratch.

Every year stores put up their Christmas decorations at about the same time, and every year we are startled and complain how they are putting them up so early this year. Complaints that it’s all become too commercialized are as traditional as you can get.

And there have always been Scrooges who think the whole thing is a waste that has gotten out of hand. The Society for the Prevention of Useless Giving (SPUG) was formed in 1912 to combat the "custom of exchanging gifts at Christmas without sentiment". Sadly, I can’t find a current web address for this group.

For the next few weeks, likely through the holidays, I will be engaged in another of my quixotic efforts at attaining actual employment. Everybody keep fingers crossed.

So, once again, I am officially declaring a Bad Money Advice hiatus. And, once again, let me take this opportunity to thank all the members of my ego-boosting cult-like following. Please try and notice that I am not around.

Generally, we can do little things in November and December to slightly lower our tax bill because, generally, we can predict what the tax rates will be in January. Not this time. Congress managed to adjourn for the elections without doing anything at all about the expiring Bush tax cuts, and when they reconvene for the lamest of lame duck sessions today I do not foresee a sudden clarity of purpose.

Could there have been any larger indication that the Democrats were in very serious trouble than that they passed up an opportunity to enact tax cuts a few weeks before an election? Yes, there were (and are) differences of opinion on what bits of the Bush cuts should be extended, but those differences ought to have been bridgeable. Instead, the Democrats became frozen in fear and indecision, petrified (and not entirely without reason) that any legislation they passed, whatever the particulars, would cost votes.

Now that the deer in the headlights has been squarely hit by what turned out to be a good sized truck, the situation is hardly any better. Say what you will about politicians pandering to voters, it does tend to get them all on the same page. With 93 members of the house packing up their offices and the other 342 not having to face voters for another two years, this is when principles become more important. And principle is the enemy of consensus.

There are no guarantees, but my money is on nothing much coming out of what is left of the 111th Congress. Both sides of the aisle will be quite happy to pass the whole mess off to the 112th in January. Sure, it would be nice if the citizenry knew, as the new year began, what tax rate they were then paying, but you can’t have everything. The cuts can be extended retroactively. Or not.

Most of the discussion of expiring tax cuts has focused on income taxes, but there is actually a vast array of tax law provisions that go poof at the end of 2010, including such things as R&D tax credits, the treatment of stock dividends, who is eligible to pay the dreaded AMT, and the repeal of the ever controversial estate tax. But with regard to the end-of-year tax planning we cannot do, it is mostly just the tax rates on two things, income and capital gains that we care about.

Income Taxes

In a typical year, when income tax rates are not changing, the general rule is that you want to put off income into next year and accelerate deductions into the current one. So, for example, you might pay your January mortgage and property tax bills at the end of December. Or, if you were lucky enough to be given the choice, you might elect to get a year-end bonus in January.

This sort of thing may not reduce what you will eventually pay to the government, but it will put it off for another year. And that’s nice. Think of it as an interest free loan.

However, it is a terrible idea if your income tax rates are going up. If you are paying 25% this year and will pay 28% next year, then you want to take all the income you can now, when it is taxed at a lower rate, and put off all the deductions you can until January, when they are more valuable.

And if you do not know if your rates are going up or not? Good luck. The most useful thing I can say is that the cost of being wrong if you assume rates will stay the same (shifting income into 2011 only to pay a higher rate on it) is bigger than being wrong that they will go up (shifting income into 2010 and passing up an interest-free loan.)

Capital Gains

To begin with, just in case you are a complete beginner, there is a big tax difference between capital gains on short term (owned for less than a year) and long term (owned for more than a year) assets. Sell something you owned for less than a year and the gain is taxed as plain old income. Depending on your forecast of what will happen to income rates, you might want to hold on to those BP shares you bought over the summer until January or sell them now. See above.

Long term gains, on the other hand, are presently taxed at only 15%. (Actually, it is 5% if you are in the 10% or 15% income tax brackets, which for an individual ends at $34,000. Elitist that I am, I will ignore this.) If the Bush tax cuts expire this will go up to 20%.

The thing about capital gains is that taxpayers often have a great deal of control over the timing of taxable events, much more than they do over plain old income. You do not pay taxes as your assets appreciate over the years. You pay taxes only in the year in which you decide to sell.

Regardless of what happens with the Bush tax cuts, the first rule on timing your sales is to try and make your gains long term and your losses short term. If it is just about time to sell something you bought 11 months ago, and it is in the black, you might want to think seriously about holding on until the position’s first birthday, which will meaningfully reduce the tax you pay on the gain.

Conversely, if the 11-month-old is underwater, that is, if when you sell you will book a loss, you should think seriously about getting out while it is still a short termer. You can net your loss against short term gains, which means that it is effectively an income tax deduction. If you hold on longer, and wind up with a long term loss, you can net that against long term gains, but with the rates for those so much lower, it is not nearly as much fun.

After doing what they can with short vs. long term holdings, most investors next try to minimize the current year’s net realized gains. Again, this only makes sense when the tax rate is not going up. Usually, towards the end of the year stock investors sell their losers to realize losses but keep winners until January to avoid realizing gains. (I believe that this habit sometimes produces what is known as the January Effect, wherein beat-up stocks outperform at the very start of the year.)

When you have one of those special years in which you know that the long term capital gains rates are increasing, then you would want to take the opposite strategy. Sell your winners and hold on to your losers. Pay taxes now on your gains at the lower rate, but defer your losses until later, when they will shield you from the higher rates.

Is this one of those special years? Could be.

Then again, if you have, like I do, what amounts to a lifetime supply of capital loss carry forwards from previous years, e.g. 2008, none of this matters much. Barring a shocking turn of events, it will be a few years until I pay capital gains taxes no matter what I do. Not something I’m proud of.

Last week Moolanomy ran a long post on Forex Trading Basics and How It Works. Although reasonably factual, the post qualifies as bad money advice for strongly implying that there is a possibility that investing in forex might be a good idea. It also ends with a paid link to a forex broker-dealer.

Forex, if you don’t know, is trading in currencies, also known as foreign exchange. And if you didn’t know that, I’m sorry I told you. You could have probably lived happily ever after without knowing that this particular intersection of investing and gambling existed. Oh well. Too late now.

Superficially, currency markets are simple. A person might buy some Japanese Yen, for example, in the hopes that it would go up in price relative to the dollar. If it does, it can be sold for a profit, if it goes down, for a loss.

Two things make this more casino-like than most financial markets. First, currencies trade very actively, literally 24 hours a day, so whatever the time of day or night there is some action to be had. Second, for reasons that are hard to explain, the margin requirements are tiny. 100 to 1 is relatively ordinary, meaning that you can buy $1,000,000 worth of Euros with $10,000 down and $990,000 borrowed. If the Euro goes up 1% you double your money. If it goes down 1% you’re wiped out. What fun!

Problem is that unless you are the kind of person who knows the names of the men in charge of the major central banks of the world, you are unlikely to have any kind of edge in this game. I’ve got a variety of financial credentials and years of experience running global (multi-currency) equity funds and I would never dream of trying to make money here. Seriously, on-line Texas Hold ‘Em is more exciting and more likely to result in profit.

I’ve several times repeated my advice on investing in individual stocks: do it if you enjoy it, but don’t expect to do better than index funds over the long haul. And, relative to forex, the stock market is a comparatively easy place for an amateur to make money. Pricing is transparent and stocks move mostly based on news that is widely available and generally understandable.  There are also elaborate regulations and occasionally even regulators to make it harder for you to do foolish things.

Forex is one of several non-mainstream investments that occasionally spark the interest of those who should know enough to stay away. Commodities, including precious metals, and collectibles, running from fine art to baseball cards, are other examples. And they all have basically the same problem. You are competing, and trading, with people who do this for a living. Not only do they know more about it, they are probably rather good at it, because if they weren’t they couldn’t make a living.

Could it be that cash, that archaic and germ-spreading form of money whose demise I have both lamented and encouraged, was making a comeback after all?

The first paragraph of the article reads:

Consumers are spending again, but gone are the days of swiping and signing for everything from lattes to lawn furniture. Shoppers are reaching for paper money, and as they do, stores and even credit card issuers are increasingly ready to reward them – with more cash.

So I guess slips of paper and metal disks are making a goal-line defense. Just when you thought that they would go the way of fax machines, the old school pulls it out in the end. Suddenly, consumers are coming to realize that swiping and signing is just a little too easy.

Well, no.

I am certain that the story SmartMoney tells is untrue from data I got from a recent article at SmartMoney called Why Cash is the New Plastic. Its second paragraph tells me that consumer spending is up 2.2% “so far this year.” Paragraph number three says that credit card spending was “up just 1.9%” this year and that debit card transactions are up 15%.

If you believe the 15% growth number (you shouldn’t) and you remember that back in 2009 debit card transactions became more common than credit card ones, you can easily work out that the growth in all plastic spending must have been north of the 2.2% growth in consumer spending. Thus, the plastic share must be increasing, not decreasing, which strongly implies that cash is not making a comeback.

Isn’t math amazing stuff?

After only a few paragraphs SmartMoney forgets the anti-plastic lead-in and starts to conflate debit transactions with the use of cash. At a certain level, this is reasonable. Cash is a flexible term. When I tell the car salesman I will be paying cash he does not expect me to hand over a stack of Benjamins. (Note to self: must try this sometime.) Perhaps when SmartMoney said “reaching for paper money” they were being metaphorical.

But even their story on debit card use is wildly exaggerated. I am not going to accuse SmartMoney of just making the 15% growth number up, but it does not jive with other, more credible, sources. Bloomberg quotes industry newsletter The Nilson Report (which is also cited by SmartMoney) as stating that debit transactions as a percentage of all transactions grew to 65% in the first half of 2010, up from 62.3% a year before.

That is a growth in market share of about 4.3%. It is not clear from the Bloomberg text if they mean share of plastic transactions, which sounds right to me, or all transactions, which is what they say. Either way, going from 4.3% market share growth to 15% absolute growth would imply a 13% year over year overall growth in either plastic spending or all consumer spending, and I think we all would have noticed that.

Even SmartMoney’s fall-back theme, that cash, by which they mean both actual paper and metaphorical debit card paper, is squeezing out bad old credit cards, is weak. Yes, credit card spending is up less than overall spending is up, (1.9% vs. 2.2%) thus it is losing some ground. But not very much. And it is, I must point out, still growing. US consumers have spent more on their credit cards so far in 2010 than they did a year before.

Furthermore, it is not hard to imagine why this slight loss in overall spending market share might be due to temporary Great Recession factors, rather than being a harbinger of some long-term trend.

The increase in debit card use is, in contrast, a bona fide long-term trend observable over many years and not obviously associated with the Great Recession. But the big picture view is not that debit cards are pushing out credit cards. Debit cards are gobbling up market share from cash.

(And checks. Remember them? You young folks may not believe this, but in the old days, when you opened a checking account at a bank they would automatically send you a box of checks without you having to ask.)

As I have said a few times in the past, I think the ubiquitous use of debit cards is bonkers. For almost everybody almost all the time, credit cards are a better deal. I am willing to make allowances for a few people with psychological issues, but that should account for something like 10% of transactions, not 65% of them.

SmartMoney makes the argument that the non-trend they didn’t spot of debit gaining at the expense of credit will continue because soon merchants will be allowed to give discounts for users of cash and debit cards. I suppose anything is possible. And the economic logic does appeal to me. Debit really is, in the abstract, a more efficient system that ought to be cheaper.

But I am pretty sure it will not happen. The discounts, on the order of 1%, would just be too small to make it worth the bother. And if it made sense for merchants, why do they not do it now? Yes, it is currently against Visa and MasterCard rules, but so is asking to see ID, and even big chain stores like Walmart and Home Depot routinely flout that rule without apology or repercussion.

I am hoping, but not expecting, that the trend in favor of debit will recede as consumers come to their senses and use credit. But I hold out very little hope for actual cash. It is now a thoroughly obsolete money technology.

I will miss using paper and metal as money in my daily life, but I think it will never quite disappear. My theory is that it will join the list of romantically old fashioned things we trot out for special occasions. In the future, when you really want to impress your date you will take her for a horse drawn carriage ride in the park, followed by a candlelit dinner. When the bill comes you will pay with folding paper money certificates.

It could happen.

Aside from the obvious problem of just not having enough money saved up, longevity risk is probably the number one challenge in planning a retirement. If you do not know how long you are going to live, how can you know how much of your kitty you can spend each year?

Annuities neatly solve this problem. You pay a lump sum to an insurance company and that company agrees to send you a check every month for as long as you are around to cash them. They even come in inflation-adjusting versions that will send you larger checks as the CPI goes up.

This sort of arrangement is practically identical to the defined benefit (a.k.a. pension) schemes that are often wistfully referred to as a part of the Good Old Days. And yet, as products, annuities are remarkably unpopular. They do exist, you can even get quotes for them online, but it is a comparatively tiny niche market. I have never seen firm numbers, but it seems safe to infer that something like only one or two retirees in a thousand buys one.

I have suggested a few explanations for this anomaly. At the top of the list is the reluctance of retirees to become broke once they exchange substantially all their assets for a stream of payments. I think they often have an ambition to leave money to children when they go, but there is also the more visceral aversion to handing over your life savings.

Into this psychological breach steps something called “longetivity insurance.” Last week The New York Times called it “a relatively new product” but all that is new is the name. This is, as the Times points out, just a plain old deferred annuity. Instead of paying you an income starting now, this will pay you an income starting some number of years from now, assuming you are still with us then.

Ignoring for the moment that this is something old in new packaging rather than a new invention, I think the pitch might just work for some older folks. Here goes:

Hey, Mr. 65-year-old, worried about longevity risk? Concerned that if you spend money now you might someday become a broke 85-year-old? Well there is a brand new product just for you: longevity insurance. Just give us a modest sum today, and if you get to 85 we will take care of you from there on out. In the meantime, all you have to do is make what you have left last until 85.

Calling it insurance counts for something. It acknowledges upfront that this is a bet of sorts that may or may not pay off, like fire insurance. You pay money to free yourself from the danger or a particular negative scenario. For the next 20 years you can manage your finances knowing exactly how long your money needs to last. If you get to 85, the insurance will kick in. If you do not, well, the kids get whatever you didn’t get around to spending. And, for now at least, you get to keep your hands on most of your life savings.

Of course, just how much of your savings you get to keep as a 65-year-old, that is, how much this longevity insurance will cost, may be a stumbling block. The Times quotes MetLife as offering a 65-year-old couple an annuity paying $1,000 a month starting when they turn 85 and going until the second one dies for $29,900. That sounds quite reasonable. A similar annuity starting right now for the couple would run about $201,000, according to my favorite annuity window-shopping site immediateannuities.com.

However, it is not as cheap as it seems. The annuity will pay $1,000 a month in 2030 dollars, not 2010 ones, and it seems reasonable to assume that the 2030 bucks will be worth a lot less. How much less? Well, the implied expected inflation rate from 20 year TIPS is 2.51%. That means that the market expects a 2010 dollar to be worth $1.64 in 2030.

So, to get an annuity that is expected to pay the couple $1,000 a month in today’s money starting in 20 years, that is, $1,640 a month in 2030 dollars, would cost $49,090. And, to be clear, that is not an inflation-adjusting annuity. That is, the payments after age 85 are fixed and will lose ground as prices rise. Further, there is no guarantee that $1,640 will in 2030 be worth what $1,000 is today. It is just the market’s best guess.

I think that what a 65-year-old couple would really want would be an annuity that was fully inflation protected, that would pay $1,000 a month in 2010 dollars starting in 2030 and continue to adjust upwards as prices rose. I cannot easily find or calculate a quote for that, but it is safe to assume that it is well above $49,090. Multiply that by how many thousands of dollars a month the couple feels they need to be comfortable and it starts to look like a pretty steep insurance premium.

Which is not to say that it is not a great idea for many newly retired folks, only that it is still a hard sell. The Times piece offhandedly and ominously tells us that New York Life “initially developed a longevity insurance product five years ago, but it never made it available because there wasn’t much demand.” Given the dizzying number of variations on life insurance offered by The Company You Keep, not enough demand to justify even offering the product must be a really small level of demand.

If this month’s frugalosphere performance is any indication, they may be soon moving up a few notches. I counted no fewer than four separate frugal tips worthy of passing along here.

Give kids cash for Christmas. Dollar-for-dollar, they will appreciate it more and it is much cheaper to ship and wrap than other gifts.

Make your own infused liquor. Wise Bread provides a recipe: put the thing with the flavor you want to add into your booze, let sit for a few days, and then strain the lumpy stuff out again. I never would have figured that out on my own. Most frugal suggested flavor source: leftover Halloween candy.

Wise Bread told us How to Live in a Big City on a Small-Town Budget. The first tip is to make sure that big city is Chicago, not New York, LA, or San Francisco. I hear Milwaukee is nice too.

And WB had an insightful discussion of the age old controversy: Canned vs. Dried Beans: Which Are Cheaper? Their research shows that although canned may seem cheaper by weight, you are paying for a lot of water that way. On a bean-for-bean basis, dry is a better buy. Sure, you have to soak them overnight, but if you normally buy three cans a week (and who doesn’t?) this could save you $25 a year. “It may not sound like much, but when you consider that it is only one item out of possibly hundreds that you purchase over the course of a year, it all adds up.”

Other blogs paled in comparison. Not Made of Money shared the little known fact that “Appliances that are turned off and still remain plugged in consume 75% of electricity usage.” I guess global warming will be easier to fight than I thought.

No Credit Needed gave us DIY directions to make a rain barrel for very little money. The first item on the list of materials is a 55 gallon barrel, which you get for free from your buddy who works at an auto-repair shop.

If you are toying with the unfrugal idea of leaving money to your kids in your will, don’t do it. As Watson Inc. points out, “Competent children don’t need an inheritance, and incompetent children don’t deserve one.” In other words, if they can make money in their own, then they don’t need yours, and if they can’t, well then who cares about those losers anyway?

Everything is negotiable was the bottom line of a post at The Sun’s Financial Diary Mastering Negotiation to Save Money. The three places where negotiation skills can be useful mentioned in the post are overdraft fees, student loans, and taxes.

Budgets are Sexy reminded us that not spending your money once is not enough. You have to not spend it repeatedly over a sustained period. And to achieve that, you need to hide your money from yourself. The author suggests putting it in a bank that is 30-50 miles away with “really crappy online access.” Just remember not to activate the ATM card or order checks. Several commenters recommended banks that helpfully make it particularly difficult to get your money back.

Free Money Finance had tips on how to graduate college in three years, so you can “get your degree and get on with life.” This post should be emailed to all freshmen. Take it from me kids, grown-up life is way way more fun than boring old college. The sooner you get here the better.

And finally, a true story of frugalism in action. The author of Money Beagle needed a new lawn sprinkler. He found them on-line for only $1.49 for a two-pack, plus $5 shipping. Needless to say, he ordered six. But then, disaster struck. One of the six did not work, leaving him with only five functioning sprinklers, just four more than he needed. The story does have a happy ending, though, as the place he got them agreed to send him a refund check for $0.75.

That may not sound like a lot of money, but in the context of all that you spend, it adds up.

There is a pretty obvious reason why buying lottery tickets is a bad idea. You will lose money. The odds are usually just awful. Casino gambling is, in comparison, a sound investment.

And, of course, casino gambling is not a wise thing to do with your savings. You would have to be off the deep end of “positive thinking” to believe anything other than it was, for some, an amusing way to waste money.

That objection to gambling, and lotteries, is today so pervasive that we have all but forgotten another traditional objection. A hundred years ago, at least as common as the argument that you would probably lose was the one that you might win. Back in the almost forgotten era when gambling of all kinds was illegal throughout the country, it was argued that gambling undermined the work ethic, allowing some to become rich without appropriate effort. And that was immoral.

The idea of wealth without work has, to say the least, lost much of its stigma. Which has left the moral rectitude camp with only one defense against the swelling tide of lotteries and other forms of legalized gambling, the bad bet argument. And that has been, manifestly, not very persuasive.

State lotteries as we know them date only to 1964, when the Live Free or Die gang in New Hampshire came up with a new way to raise money without raising taxes. Today 43 states have lotteries. (One of the seven holdouts is Nevada. I don’t think that’s on moral grounds.) My own state of Massachusetts leads with the highest per capita annual spending, at $700. Nationally, we spend more on lotteries than we do on movies.

The problem with arguing against lotteries on the basis that they are a losing proposition is that it boils down to an argument that the government should prohibit people from doing foolish things with their money. That goes against what most of us think governments should do, and if the alternative is taxing us not-quite-so-foolish types more, then there is really nothing left to discuss.

Enter the brand new third argument against lotteries. Even if you win, you will become unhappy and broke.  It is basically a fraud argument. Never mind the poor odds that make it a waste of money, the promised prize is far less desirable than advertized.

The lottery winners turning out poor theme has been rattling around the blogosphere for the past few months. Our old friend Dave Ramsey in June shared some statistics on the subject

Did you know the divorce rate among Lotto winners is four-fold the national average? Also, 65% of Lotto winners are bankrupt within 15 years.

Shockingly, Ramsey did not cite sources for this data.

Several other blogs and newspapers have picked up this story line lately, all with anecdotal tales and some with statistics from unnamed sources. The Consumerist carried a post headlined 1 in 3 Lottery Winners Broke Within 5 Years but not only was that number unsubstantiated, other than a 32 word introduction, the entire post was a quote from an article from the Eagle-Tribune (Lawrence, MA). Nothing wrong with that article. It has stories of local people who have won lottery prizes and quotes from financial planners saying the first thing a new lottery winner should do is to hire a financial planner.

Indeed, the fact that many, if not most, lottery winners wind up penniless is accepted so broadly that it is simply assumed in most discussions. Free Money Finance had a post in October Another Broke and Unhappy Lottery Winner quoting an obit from 2006 of one William “Bud” Post III. Post is often cited in these discussions.  Although he died at only 66, he lived a full life, including a $16.2 Million lottery prize, seven wives, ten children (nine with wife #2, another with an unmarried companion), jail time for writing bad checks and assault, and a brother who hired a hit man to rub him out. I guess we always knew winning the lottery brought excitement into your life.

A few weeks ago The Digerati Life brought us a post Why Lottery Winners Go Broke: Prospect Theory At Work, which tried to explain this phenomenon we all now understand to be true. And earlier this month the Detroit Free Press ran a heart warming story of lottery winners who did not go broke, something that would be too dog-bites-man to publish if it were not for the general assumption that winning the lottery is actually a curse.

Personally, I am an agnostic when it comes to the question of what generally happens to the wealth of lottery winners.  I am willing to assume that a person who has won $1 million in the lottery will, on average, act more foolishly with it than a person who has saved $1M carefully over many years. But until somebody can send me a link to a bone fide study of lottery winners I will presume that the X% go bankrupt stats are numerical fiction.

When you get down to it, our readiness to believe that lottery winners soon go broke is based on the same sense of morality that was behind the objection to gambling that wealth without effort was wrong. Deep inside our national psyche is the background hum of the Protestant Work Ethic, the idea that material wealth is the divine reward for hard work and clean living. Vast riches given to somebody stupid enough to buy a lottery ticket upsets the natural order of things. So of course they have to blow it all soon enough.