The Wealth Gap Persists

A significant issue is the gap between Whites and minorities in household wealth. The average wealth of black households is 23% of the average wealth of white households in the Survey of Consumer Finances despite the fact that the average black income is 50% of the average white income (Altonji, Doraszelski, and Segal 2000). A key contributor to wealth accumulation is investment in risky, high yield investments such as stocks and the savings rate of a household (Wang and Hanna 2007). However, it is not clear what factors contribute to the disparity in financial risk behavior among ethnic groups. African-Americans and Hispanic consumers are significantly different from their White counterparts in their financial product preference and investment asset portfolio (Plath and Stevenson 2000). They tend to prefer near-term savings, favoring liquidity and low investment risk and have a strong affinity for insurance and shy away from financial assets with higher risk and returns, such as common stock, mutual funds, brokerage accounts, and corporate bonds (Plath and Stevenson 2005). Interestingly, a review of studies shows that while African Americans and Hispanics are less likely to take on investment risk than Whites, they may be more likely to take on substantial investment risk than Whites (Yao, Gutter, and Hanna 2005). In addition, White households are more likely to have higher stock ownership than minority households even after controlling for variables such as income (Schooley and Worden 1996; Wang and Hanna 2007; Wang and Hanna 2006; Zhong and Xiao 1995). There are also differences in savings behavior for minority households and are less likely to invest in riskier, high yield assets (Choudhury 2002). Thus, there is a pressing need for consumer behavior researchers to develop a better understanding of the factors impacting financial decision making (Bazerman 2001) especially for vulnerable populations such as ethnic minorities.

Subprime Ravages the Minority Community

A serious example of how consumers have been prodded into financial products that are ill-suited and hazardous is the marketing of subprime mortgages to minority communities. As of mid 2007, the value of subprime mortgages in the U.S. was estimated at $1.3 trillion (Associated Press 2008b). This was a mere 6% of all types of mortgage loans outstanding but represented 43% of the foreclosures stated by third quarter of 2007 (Brooks and Simon 2007). Evidence indicates that African Americans and Hispanics were placed in subprime loans at more than double the rate of White Americans and Asian Americans (Associated Press 2008a) and 61% of borrowers with subprime loans had credit scores high enough to qualify for conventional loans. It is estimated that subprime loans taken over the last 8 years will result the total loss of wealth for people of color is between $164 billion and $213 billion and will result in the single largest drain of wealth from the African American and Hispanic community in history (Rivera et al. 2008).