Social Risk and Portfolio Choice

Abstract

Experimental and field data suggest that a social factor, discrimination, affects the risk perceptions and portfolio decisions of U.S. households. Experiments indicate that minorities perceive greater income risk. Minorities with relatively high risk perceptions are 10% less likely to invest. Discrimination further lowers the stock ownership of minorities by 2-5%. For White heterosexual males, there is no relation among perceived income risk, discrimination, and stock ownership. Results using field data support the experimental evidence, indicating that discrimination reduces stock ownership among minorities by 4-8%. The economic significance of socially-amplified risk perceptions is comparable to that of income and education.

Keywords: Stock market participation, asset allocation, income risk, subjective probabilities, household finance

JEL Classification: D14, D81, G11, J15, J16