Race and Time Preference

According to this article from ABC only 34% of blacks own stocks compared to 61% of whites. If this article simply acknowledged this fact and its implication for the so-called racial wealth gap it wouldn’t get much attention. Instead, the author propounds a litany of excuses for why blacks can’t invest in stocks.

“We didn’t have a grandfather or aunt or uncle or mom and dad educating us on the markets because they didn’t benefit from it because of historical discrimination in this country,” said John Rogers, founder and co-CEO of Ariel Investments

Neither did I. My grandparents and parents never talked to me about the stock market. Yet somehow I still figured out how to invest which is incredibly easy in our digital age where you can start a portfolio or account in a matter of minutes and buy fractional shares for pennies on the dollar.

Black people have also often lacked the opportunity to build up wealth, park it in the market and watch it grow over time. In general, they have lower incomes, which leaves less money to invest after paying bills. Many also work jobs that don't offer retirement plans like a 401(k).

The median black household income is $45,870 as of 2020 which is more than I make annually and I also do not have an employer sponsored 401K. Yet, incredibly I still figured out how to invest at least $300.00 a month not only in an index fund but also LRO loans as well. Did I mention you can invest for pennies on the dollar? You don’t need a big income to invest.

But researchers say that even wealthier Black households are much less likely to own stocks than their white counterparts. That means they missed out on the roughly 260% returns for S&P 500 funds over the last decade and the resulting chance to see their wealth grow.

And here we get to the truth of the matter: there are racial differences in risk aversion and time preference.

Instead of stocks, wealthier Black households are more likely to own assets that have a reputation for being safer, such as bonds, life insurance or real estate, said Tatjana Meschede, associate director at Brandeis University’s Institute on Assets and Social Policy.

So blacks, even with wealth, value a higher level of certainty over higher returns. That is the trade off they’ve freely chosen.

Kashif A. Ahmed, president of American Private Wealth, a financial planning firm in Bedford, Massachusetts, remembers giving a talk at a Black church about the higher long-term returns that stocks have historically provided. One person sitting in the audience said, ’That’s all fine and wonderful, but this is all for white folks, he said. Malcolm Ethridge, a financial adviser in the Washington area, regularly sees a reluctance to invest in stocks among Black people with enough money to do so, such as tech executives, attorneys and people who inherited rental properties.

Even when incomes are the same. Lower income whites still have more than 4.5x the wealth than lower income blacks and almost 3x the net worth of lower income mestizos.

In 2016, lower-income white households had a net worth of $22,900, compared with only $5,000 for black households and $7,900 for Hispanic households in this income tier. To some degree, this reflects differences in homeownership rates among families – 49% for lower-income whites, versus 31% for lower-income blacks and 30% for lower-income Hispanics.

Of course, while the homeownership rate is higher for lower income whites there is no house that you can buy for $23,000 in this day and age; even a crappy mobile home would be well over that amount. So the median wealth of lower income demographics not only reflects differences in ability to secure a mortgage but also saving, investing and spending patterns in general. This becomes more obvious when we look at conspicuous consumption.

So blacks are more averse to long term investments that are highly risky in the short run but provide higher returns in the long run but not the conspicuous consumption of things that are guaranteed to depreciate in value.

To examine spending by racial groups, Roussanov and his colleagues studied data collected from 1986 to 2002 for the Consumer Expenditure Survey conducted by the federal Bureau of Labor Statistics. Blacks and Hispanics spend up to 30% more than whites of comparable income on visible goods like clothing, cars and jewelry, the researchers found. This meant that, compared to white households of similar income, the typical black and Hispanic household spent $2,300 more per year on visible items. To do that, they spent less on almost all other categories except housing, and they saved less.

So blacks and mestizos are more concerned with posturing by showing off higher social status with “bling”, as they call it, than saving and investing in assets that while riskier in the short run provide much higher returns in the long run. Again this is a conscious decision. Whitey isn’t forcing them to do this. The $2300 opportunity cost is self-imposed. The clear difference here is that they have a higher time preference, especially for social status, than whites. Frankly, I would rather be a home owner with a jalopy than renter with a new Camaro. Blacks and Hispanics generally prefer the opposite.

Apparently financial literacy is also a problem for them.

On average, African Americans answered 38% of the P-Fin Index questions correctly; only 28% could correctly answer over half the questions.

In a digital age where all of this information is literally at your fingertips, whining about a lack of formal education isn’t a valid excuse anymore. You don’t need to take a personal finance class or earn a pricey college degree in business management or accounting to figure this out. The only barrier to financial literacy in the information age is time preference and g factor.

The belief and insistence that blacks can ever be equal in wealth to whites is an article of faith. It is a purely faith based religious belief for which there is no evidence. To the contrary group differences in time preference, risk aversion and intelligence will always lead to a group “wealth gap” even when incomes are equalized and no amount of affirmative action and reparations will change that.