Cultural Difference: Investment Attitudes and Behaviors of High Income Americans

Cultural Difference:Investment Attitudes and Behaviors of

High Income Americans

Tahira K. Hira – Iowa State University515.294.2042 [email protected]

Caezilia Loibl – Ohio State University

Tom Schenk Jr. – Iowa State University*This work was made possible by a generous grant from FINRA Education

Foundation.

Academy of Financial Services - October, 2007

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Introduction

• What is the next generation of investors in the United States going to look like

• Will the high income diverse investors perceive and behave differently – When investing and– When planning for retirement

• What will be the effects of these differences


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Objectives

• Survey– Focus on high income investors– Includes Whites, Blacks, Hispanics, and Asians

• Research Topics– Risk tolerance level– Investor confidence– Retirement confidence


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Procedures• National Random Sample

– Sample 4,1410– Targeted geographical areas wit Av. households incomes

of $100,000 and – high concentration of minorities - 30%

• Data Collection– 911 households agreed to participate– CCSM conducted phone interviews between 0/05 and 2/06 – Average phone interview - 22 minutes– Response rate of 22%


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Descriptive StatisticsVariable White Black Asian Hispanic

Full-Time Employment 74.3% 77.8% 80.0% 78.3%

Occup. Professional 51.6% 40.9% 42.9% 31.9%

Bachelor & Masters 67.0% 65.3% 75.7% 56.5%

Married 89.6% 84.7% 95.7% 88.4%

Male 66.4% 48.6% 65.7% 65.2%

Age 48.8 47.1 46.1 45.4

Household Size 3.36 3.65 3.66 3.61

Income ($) 128,900 119,434 138,426 120,746

Debt ($) 189,740 110,554 326,343 150,659


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Risk Tolerance: Measure

“Are you willing to take ---

1 = substantial financial risks to earn substantial returns

2 = above average risks for above average returns

3 = average risks for average returns

4 = below average risks for below average returns

5 = or no risk at all?”


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Risk Tolerance: ResultsPercentage Responding "Agree" or "Strongly Agree"

Risk Threshold White Black Asian Hispanic

High Risk 45 42 46 30

Average Risk 46 42 37 52

Low Risk 9 17 17 17

*Chi-square statistic is significant at the 10% level.


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Risk Tolerance: Regression Logit Regression of Risk Threshold (High Risk = 1, Low is 0)

Selected Demographic Coefficients

Variable Coefficient p-value

Age -.056 0.108*

Household Size 0.15 0.241

Divorced 0.288 0.685

Widowed -0.898 0.286

Single/Never Married -0.926 0.176


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Risk Tolerance: RegressionLogit Regression of Risk Threshold (High Risk = 1)

Education Coefficients (Less than High School omitted)


High School Diploma .948 0.516

Some College 1.79 0.202

Bachelors Degree 2.22 0.121

Masters Degree 2.43 0.095

PhD, MD, DDS, etc. 3.42 0.028

Investment Strategy -.332 0.002


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Risk Tolerance: Regression

Logit Regression of Risk Threshold (High Risk = 1)

Race and Ethnicity Coefficients (White omitted)


Black -.946 0.062

Asian -1.83 0.000

Hispanic -1.30 0.005


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Risk Tolerance: Regression

Logit Regression of Risk Threshold (High Risk = 1)

Income Coefficients


Income .112 0.014

Net worth -.00000006 0.792


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Predictors of Risk Tolerance:

• Demographics– Age (negative)– Race (white)– Income (positive)– Education (positive)

• Follow consistent investment strategy (negative)


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Investor Confidence-Measure

Tell me “whether you strongly disagree, disagree, agree, or strongly agree with each of statement”

• I am confident about my ability to invest• I worry about the outcome of my investments• I am knowledgeable about investing


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Investor Confidence: Results

Percentage Responding "Agree" or "Strongly Agree"

Confidence Indicators White Black Asian Hispanic

Knowledgeable About Investing***

62 66 71 65

Confident About Investment Ability*

62 60 77 68

Worry About Outcome of Investments***

54 49 60 50

Chi-square test: * indicates 99% confidence; *** indicates 99% confidence


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Investor Confidence: MalesPercentage Responding "Agree" or "Strongly Agree"

(Percentage Male-to-Female Difference)

Confidence Indicators White Black Asian Hispanic

Knowledgeable About Investing

65(+3)

76(+10)

79(+8)

70(+5)

Confident About Investment Ability

67(+5)

69(+9)

78(+1)

68(-0)

Worry About Outcome of Investments

44(-10)

59(+10)

64(+4)

51(+1)


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Retirement Confidence- Measure

“Tell me whether you strongly disagree, disagree, agree, or strongly agree with each of the following statements”

• I maximize contributions to my retirement account• I have a clear idea of my financial needs during retirement• I am confident I will be financially secure


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Retirement Confidence: ResultsPercentage Responding "Agree" or "Strongly Agree"

Confidence White Black Asian Hispanic

I maximize contributions to retirement account***

75 70 83 75

I have a clear idea of my financial needs during retirement***

72 73 70 71

I am confident I'll be financially secure***

81 89 86 86

Chi-square Test: * indicates 99% confidence; *** indicates 99% confidence


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Summary: Risk Tolerance

• Differences– Minorities (including Asians) tend to be less risk tolerant

than whites– Marital status, household size, and gender did not

influence risk thresholds• Similarities

– Higher income increased risk tolerance.– Age decreased risk tolerance


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Summary: Investor Confidence

• New Findings– Minorities are generally at least as confident as whites

…especially Asians• Similarities

– Men claim to be…more knowledgeable about investing…confident…but worry more often (for minorities)

• Differences– Gender effects tend to be strongest for whites


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Summary: Retirement Confidence

• New Findings– Asians are more likely to maximize contributions to their

retirement accounts• Differences

– Minorities do not exhibit lower retirement confidence levels

• Similarities– Overall levels of retirement confidence are high among all

ethnic and racial groups


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Implications• Minorities being less risk tolerant may imply greater

wealth inequalities (in the long run)– “ we should help target groups who are under

investing”• Minority females are less confident investors

– “we should target education programs to women”• Favorable outlook for the well-being during retirement for

high net-worth minorities and whites


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Questions and Answers

Dr. Tahira K. Hira

Iowa State University

515.294.2042

[email protected]

www.eng.iastate.edu/tkhira

This work was made possible by a generous grant from FINRA Education Foundation

http://www.eng.iastate.edu/tkhira

Cultural Difference: Investment Attitudes and Behaviors of High Income Americans

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