Discrimination, Social Risk, and Portfolio Choice

Abstract

This study shows that minorities over-estimate their financial risk due to exposure to social discrimination. Consequently, they participate less in the stock market and allocate a lower proportion of their wealth into risky assets. That is, individuals who perceive discrimination are between 4% to 40% less likely to participate and, conditional on investing, allocate about 2% to 9% less of their wealth to equities. We find these effects consistently among women, African Americans, and gays/lesbians. Our results suggest that non-financial risks, such as social risk, influence financial risk-taking behavior of U.S. households.