Coral Gables, Fla. – December 9, 2016 – African Americans, women, and LGBTQ individuals – those more likely to experience social discrimination in their lifetime – are less likely to participate in the stock market and also allocate less of their wealth to equities, says new research from the University of Miami School of Business Administration. The findings, presented during the School's Dec. 8 - 9 Behavioral Finance Conference, arise from the impact of discrimination on how individuals belonging to minority groups perceive risk. The study shows that individuals who are discriminated against are likely to overestimate their exposure to risks, such as income risk. This biased perception of risk induces them to take on less financial risk. These results indicate that social factors such as discrimination, can influence the financial risk-taking behavior of U.S. households.
“Despite the strong evidence of discrimination, until now, there was little work on how it affects portfolio decisions,” said Alok Kumar, Gabelli Asset Management Professor of Finance and finance chair at the University of Miami School of Business Administration, who conducted the work with George Korniotis and William Bazley also from the University of Miami, along with Yosef Bonaparte of the University of Colorado Denver.
“Our work is related to the growing body of evidence that personal experiences affect economic decisions. Studies like this make a strong case for increased financial education and perhaps policy implications in our country, as such financial behavior does impact the nation’s economic health,” said Korniotis.
Methodology and Results
The analysis was conducted using multiple datasets, including a 2004 Los Angeles Times Poll (LATP) that addressed gay issues; the National Longitudinal Survey of Youth (NLSY), which surveyed participants about wealth, income, financial decisions, and exposure to discrimination; the Survey of Consumer Finances; and experimental data. Key findings show that the experience or fear of discrimination affects investment decisions:
- LGBTQ individuals who potentially have been discriminated or fear discrimination are about 40 percent less likely to participate in the stock market.
- African Americans who feel it has been difficult to get a good job due to discrimination are about 8 percent less likely to participate in the stock market, and allocate about 9 percent less of their wealth to equities.
- Women who feel it has been difficult to get a good job due to discrimination are 4 percent less likely to participate in the stock market, and allocate about 4 percent less of their wealth to equities.
To identify the economic mechanism behind this observed phenomenon, the researchers conducted an experiment that showed that minorities like LGBTQ individuals, African Americans and women, perceive the evolution of income differently. In particular, they are more conservative about future income compared to white heterosexual males.
The full study can be found here: https://ssrn.com/abstract=2863351
University of Miami School of Business Behavioral Finance Conference
Sponsored by the Department of Finance at the University of Miami and the Review of Financial Studies, the Miami Behavioral Finance Conference, in its seventh year, draws academic leaders spanning the globe for a chance to present new research, and hear from top researchers in the space. Hundreds of papers from all areas of behavioral finance and economics are submitted each year, and a handful chosen for faculty presentations and peer discussion. In addition to the regular paper presentations, the conference includes two short doctoral student presentations. For more information and to see more of this year’s papers, please visit: http://bus.miami.edu/umbfc.
About the University of Miami School of Business Administration
The University of Miami School of Business Administration is a leader in preparing individuals and organizations to excel in the complex, dynamic, and interconnected world of global business. One of 12 schools and colleges at the University of Miami, the School offers undergraduate, master’s, doctoral, and executive education programs. With its location in a major center for international business, the School is acclaimed for its global perspective, student and faculty diversity, and engagement with the business community. More information about the University of Miami School of Business Administration can be found at www.bus.miami.edu.