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February 2022

The Psychology of Financial Windfalls


Maybe it was a $20 bill you found on the subway platform or sidewalk. Maybe it was a surprise bonus at work. Or maybe it was money inherited from a relative. Whichever the case, maybe you were one of the lucky ones who’s come into a windfall of money, small or large.

If you’re reading this and thinking, “Fat chance, that’s not me!” wait just a minute. Because odds are that even if you haven’t yet experienced such a windfall of money, you most likely will at some point—even if it’s as mundane as a tax refund that’s higher than you expected, or a stimulus check from the government.

But we shouldn’t be asking, “How can we predict when we’ll get a windfall of money?” (Though I’d love to be able to answer that!) Instead, we should be asking, “How should we treat such windfalls? Should they be spent in a ‘treat yo’ self’ splurge? Socked away in an investment account to be used for the future? Or a little of column A and a little of column B?”

Before attempting to answer, let’s talk about what people actually do with windfalls. Almost 30 years ago, Hal Arkes, a psychology professor at the Ohio State University, and his colleagues decided to find out. Academic articles are rarely known for their compelling narratives, but Arkes’s paper is an exception, and he opens with a good tale.

As the story goes, a publishing house planned its annual meeting at a hotel in the Bahamas. Shortly before the convention started, a university decided to buy up one of the publisher’s texts. It was a big sale, but no single salesperson could take credit for it and thus lay claim to the bonus associated with such a catch. So, the publisher decided to get creative and divide the bonus across the entire marketing department: Each salesperson received $50 upon arriving at the hotel.

Nearby was a casino. One of the salespeople, Nancy, spent the whole of her $50 gambling, as did many of her coworkers. But she later expressed regret about her decision: “If I hadn’t been given the $50, there’s no way I would have spent a dime at the casino. There are a million things I could have used that money for. Why did I waste it?”1

That, of course, is just one anecdote. But across several experiments, Arkes and his collaborators found when blessed with a financial windfall, many folks tend to spend rather than save.

In one study, for instance, a group of research participants learned in advance that they’d receive $5 for participating in a study. Another group, however, only learned about the $5 payment by surprise, upon arriving at the lab.

Both groups received their 5 bucks and were then sent to see a college basketball game. When asked afterward how much of their $5 they had spent at the game, the folks who had received the money by surprise—those for whom the money was a windfall—spent about twice as much of it compared to those who had tagged the money as planned earnings.

This finding extends beyond carefully controlled laboratory contexts and into the real world as well. When grocery store shoppers used $10 coupons, for example, they spent about $1.59 more than when shopping without such coupons. Sure, that’s small potatoes. But it’s not as if they stocked up on essentials they could use in the future. On the contrary, shoppers were considerably more likely to spend their small windfalls on items they typically didn’t purchase.2

So why would the marketing staff of a publishing house, research subjects at a basketball game and grocery shoppers armed with coupons all spend their small windfalls (and sometimes on otherwise regrettable purchases), rather than use them in more prudent ways?

Windfalls vs. Earned Income

To some extent, such patterns may be due to the simple fact that windfalls feel like unearned money. Consider how we treat the income received through our paychecks. That money is valuable—after all, we’ve worked hard to earn it—and it could feel, psychologically speaking, like a loss if we mindlessly spent it.

A windfall, by contrast, is unearned and unexpected. In that way, even though $10 earned has the same spending power as $10 unearned, we may see the money from a windfall as less valuable. It’s easier not to “count” that money as part of our earnings, and thus, easier to spend it.

In a series of research studies, Nick Epley, a professor of behavioral science at the University of Chicago’s Booth School of Business, tackled this explanation head-on. He and his colleagues sent undergraduate research participants $50 checks that presumably came from a faculty member’s research budget.

The researchers described the money as a “tuition rebate” for half of the participants and “bonus income” for the other half. When later asked how much of their $50 they had spent, students who had received a “bonus” spent significantly more of their money than those who had received a “rebate.” In fact, almost three-quarters of those with rebates spent none of their money; only 36% of those with bonuses could say the same.3

Think about what’s happening here: A rebate, just like earned income, feels like money that is owed to us, and we normally put it right into our metaphorical pockets. A bonus, on the other hand—well, that’s just like a windfall. Rather than feeling like it’s money that’s owed to us, it takes on more of the flavor of house money—money that isn’t ours and that we can spend freely. As Epley wrote in an op-ed, rebates “send us on trips to the bank. Bonuses send us on trips to the Bahamas.”4

What’s the takeaway? Money is money. If you’re short on your budget for an upcoming vacation and happen to come into a small windfall, then use it for the trip! But if you find yourself coming up short for necessary expenses, it may be wise to consider using a new windfall in more pragmatic ways—whether it’s a tax refund, small inheritance or $20 bill found on the sidewalk.




1Hal R. Arkes, Cynthia A. Joyner, and Mark V. Pezzo, et al., “The Psychology of Windfall Gains,” Organizational Behavior and Human Decision Processes 59, no. 3 (September 1994): 331-347.

2Katherine L. Milkman, John Beshears, “Mental Accounting and Small Windfalls: Evidence From an Online Grocer,” Journal of Economic Behavior & Organization 71, no. 2 (August 2009): 384-394.

3Nicholas Epley, Dennis Mak and Lorraine Chen Idson, “Bonus or Rebate?: The Impact of Income Framing on Spending and Saving,” Journal of Behavioral Decision Making 19, no. 3 (July 2006): 213-227

4Nicholas Epley, “Rebate Psychology,” New York Times, January 31, 2008.


This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.