The Impact of Financial Literacy, Generation, and Socioeconomic Factors on Financial Risk Tolerance: An African American Study

Abstract

Previous research that considered African Americans as a homogenous group has determined that they are reluctant to invest in equities and corporate debt bonds, resulting in lost opportunities to build wealth. This study explored financial literacy, age and generational cohort identity, and socioeconomic factors as possible limitations to African Americans’ engagement in financial markets to build wealth. Financial risk tolerance is usually measured using three basic approaches: (a) assessing investment portfolio assets; (b) assessing responses to subjective questions; and (c) assessing responses to hypothetical questions with specific scenarios. The third approach was utilized in this study by conducting a multidimensional risk analysis with a 13-item assessment that addressed the constructs of investment risk, risk comfort and experience, and speculative risk. African Americans appear to be no different from any other group of Americans when provided with education to improve their financial literacy and financial risk tolerance levels, which are critical for reaching long-term wealth goals.