The Puzzle of Stock Market Participation: Is Racial Integration a Missing Piece?

Economists have yet to solve the puzzle of stock market participation. What is it that motivates a person to invest? And why do some people with the means to invest decide not to? What economists know for certain is that racial disparities continue to exist in stock market participation in the United States. 

According to the Federal Reserve Board’s Survey of Consumer Finances, just 34% of Black American households owned equity investments in 2019 compared to 61% of white households. Black families also invested less in equity on average — $14,400 for the typical Black household compared to $50,600 for the typical white household. This gap persists among households with above-median net worth.

This sharp divide in stock market participation makes identifying the motivations behind investment decisions all the more pressing, and bridging this divide could help to close the larger racial wealth gap. The subject of wealth inequality is of particular interest to Melina Vosse, PhD, assistant professor of finance at the University of San Diego Knauss School of Business. Vosse’s research focuses on the impact of social dynamics on financial outcomes, and, most recently, the influence of diverse social networks on financial decision-making.

Social Networks, Integration and Household Finance

In a 2019 report, McKinsey & Co. named stock market investments among the top drivers of the nation’s wealth gap. The report cites the broader economic benefits of narrowing racial wealth disparities, asserting that such efforts could raise the U.S. gross domestic product by as much as 6% by 2028. 

In identifying the factors that contribute to the persistent racial wealth gap, the report cites “community context” as one of the top opportunities to break down these economic barriers. This underscores the idea that social networks are pivotal to financial growth, particularly for marginalized groups. Why might community be key to wealth building? McKinsey finds that “communities with high levels of economic activity and rich social networks tend to produce more affluent families and contain assets (such as homes and businesses) that are valued more highly.”

Vosse explores this connection between individual wealth and communitywide financial outcomes in her paper “Strength in Differences: How Racial Integration Shapes Household Financial Decision-Making.” Here, she examines stock market participation in racially integrated communities, proposing that residential segregation is directly related to the nationwide gap in participation, while diverse communities have access to a wider range of investment-related insights — leading to improved financial outcomes for all.

Defining Social Integration and Its Effects on Household Finance

To examine the impact of racial integration on the decision to invest in public equity markets, Vosse had to first determine a definition for integration and decide how to measure it in the context of her research. She started by defining integrated environments as areas where there is a high likelihood of interaction between Black and white individuals. 

Vosse then referenced data from the U.S. Census Bureau to calculate the probability of contact between Black and white individuals by examining the spatial distribution and total population of racial groups residing in a specific community. Using these methods, Vosse defined areas with 50% exposure probability as the most diverse, meaning that individuals of either race are equally likely to interact with those of the same race and those of a different race. 

With this measure of integration in place, Vosse could proceed to test the effects of racial integration on household financial decision-making. The ability to measure the level of interaction between households based on their proximity to one another was an important distinction in the research. 

“I wanted to figure out how likely it is for someone to encounter someone from a different background,” Vosse explained in a recent interview discussing the paper. “You could have the very same percentage of Black, Hispanic, or white individuals in two counties, but the likelihood of exposure may actually be higher for one of those counties.”

In a later phase of the research, Vosse also observed the degree of sociability in a community and its effects on integration. She considered characteristics such as population density and the number of civic organizations and recreational sports centers in a given area. While the measure of integration identifies the likelihood of Black and white individuals encountering one another within a certain area, the sociability measure explores the likelihood that these individuals are directly exchanging information related to investing — in venues where such information is typically shared.

Social Connections Expand Financial Awareness

By building a dataset that captures financial behavior at the neighborhood and household level, supplemented by individual holdings and trades data, Vosse found that those who live in racially integrated counties are around 4% more likely to invest in public equity markets than those who live in segregated counties, affirming the influence of integration on stock market participation. 

She also found that households in integrated areas engage in riskier trading behavior while also achieving significantly higher returns on the local portion of their stock portfolios. This finding suggests not only that these individuals have access to high-quality information that influences their investment behavior, but that they trust the information available in their social circles enough that it informs their financial decisions — despite the potential for risk. 

Vosse believes that greater availability and scope of information related to financial investment is a clear benefit of bringing people with diverse perspectives and backgrounds together in a shared community. She envisions neighbors sharing financial insights with one another in person, at central venues within their community. 

“It could be as discrete and concrete as talking to someone in a coffee shop who made money investing in a particular company,” Vosse said. “Or the information sharing could be less direct. Say, finding out about a company you’d like to invest in by striking up a conversation with somebody who has a different background than you who happens to work there.”  

Casual exchanges like these are commonplace in residential communities, and Vosse finds that more diverse neighborhoods have access to a larger range of financial insights through in-person interactions. “If you’re living in these more segregated neighborhoods where you’re just talking to the same people who have the same background as you, you’re less likely to learn about the benefits of investing in the stock market or how to invest in the first place,” she said.

Communitywide Financial Benefits of Social Integration

Having established that people who live in more diverse communities are more likely to own equity investments and benefit from increased access to investment information, Vosse set out to explore whether racial integration affects the investment decisions of white and Black households differently. For instance, if investment information is primarily concentrated in white households, an increased number of Black residents wouldn’t necessarily impact the investment decisions of the larger community.

To test the communitywide financial benefits of social integration, Vosse examined population shocks to San Antonio, Dallas and Atlanta in the wake of Hurricane Katrina. These locations are uniquely suited to measuring equity participation because they experienced some of the largest migrations of New Orleans residents, and Vosse’s formulas also showed an increased probability of interracial exposure in these locations. 

By establishing a treatment group of residents in each of these locations and comparing them to control groups with demographically similar residents, Vosse found that white households were significantly more likely to participate in the stock market after these population shocks, further supporting the claim that integration increases the likelihood of exposure to investment information.

The increase in equity participation for white households in these three locations suggests that Black households are influencing financial decision-making in their communities, an unexpected insight in Vosse’s research. 

“I expected to find that just the minority population would benefit from integration,” she said. “But the fact that white households are also benefiting means that any family living in a segregated neighborhood faces informational barriers that prevent them from making good financial decisions. So integration helps everyone.”

Opportunities for Future Research in Household Finance

Vosse’s research also highlights the persistent, intergenerational effects of redlining — a measure introduced in the late 1930s by the Home Owners’ Loan Corporation (HOLC). In an ostensible effort to avoid financial losses for mortgage lenders, the HOLC drafted residential maps that designated areas with primarily Black populations as “undesirable” and “high risk.”

This discriminatory housing policy initiated a cycle of segregation in these communities that has continued for decades. As an example, the Indiana-based community information system SAVI found that the HOLC’s original redlining of Indianapolis neighborhoods accurately predicted 85% of areas that have experienced segregation as recently as 2018. 

Vosse is in the beginning phases of additional research that observes the intergenerational effects of segregation. Specifically, this new work will focus on families that lived in segregated areas in the early 20th century and will explore how this history influences the financial well-being of their descendants.

Understand the Intricacies of Financial Decision-Making

For Professor Melina Vosse, a larger takeaway from her research on integration and financial decision-making is the importance of connecting with those who don’t share your background. “There’s the potential to become siloed in our own echo chambers,” she said. “Talking to someone who’s different from you allows you to ingest diverse viewpoints and contradictory ideas. And that can expand your information set and your view of the world.”

As a faculty member at the University of San Diego Knauss School of Business, Vosse is part of a dynamic team exploring the complex interplay of finance, societal dynamics, and wealth disparities. The University of San Diego provides an ideal environment for students to build upon their understanding of today’s top socioeconomic challenges while gaining the skills to drive positive change.

Recommended Readings:

The Psychology of Risk: Understanding How Optimism Bias Impacts Taxpayer Behavior

What Post-ACA Healthcare Utilization Rates Say About Race and Healthcare

Beyond the Wall: What Really Motivates Mexico-U.S. Migration?

 

Sources:

Federal Reserve, “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances”

McKinsey & Co., “The Economic Impact of Closing the Racial Wealth Gap”

NPR, “Interactive Redlining Map Zooms in on America’s History of Discrimination”

SAVI, “The Lasting Impacts of Segregation and Redlining”

Social Science Research Network, “Strength in Differences: How Racial Integration Shapes Household Financial Decision-Making”

 

Melina’s research centers on retail investment behavior and information environments, aiming to understand how social dynamics and information systems influence investment choices. She is passionate about generating knowledge that can help reduce wealth inequality and is currently focusing on the impact of residential segregation on the financial outcomes of minority households. She is also interested in understanding psychological biases that can lead investors to make suboptimal investment decisions and how these biases impact capital markets.