I've heard this story dozens of times, usually from morally-aggressive people as an anecdote for why money is evil. I've heard it discussed on radio talk shows, and also by radio DJs. I could swear I've read about it here before, and I'm sure I've seen it on TV too.
I'm not qualified to say whether that is a known psychological reaction, but it would seem relevant to the startup world.
It doesn't sound to me like he necessarily has a money-management problem. He probably still is quite rich. It's the rest of his life that is ruined.
I, like a lot people, have had daydreams about winning the lottery and what I would do with the money. I'd consider myself relatively fiscally intelligent, I'd make a few gratuitous purchases but most of the money would get invested. However, my daydreams also include giving a lot of money to the people I love. Seems like a harmless, selfless gesture, but Jack Whittaker's generosity towards his granddaughter contributed to events that eventually led to her death.
Sure, I have no idea what his granddaughter was like before the money, and maybe she was already on that collision course, but it made me think about how giving someone a ton of money could seriously negatively impact their life.
If you give someone like that a lot of money, it makes all their own accomplishments meaningless in the same way the subject of the story had his own accomplishments made meaningless by such a big windfall. They'll lose a big source of self respect. They'll resent you for it, even if they don't understand why.
I'd feel obligated to pay for modest things for family and friends, like large holiday and birthday gifts, partial college for nieces and nephews -- maybe buy an "AirBnB condo" near campus and give them free room & board. Maybe give away a cheap good used car every year. Maybe angel invest in a couple of friends' startups.
Maybe it's because of my poor roots, but I would try to help out the people around me who've helped me in the past, in small ways.