Wealth disparities among racial groups in America are caused by multiple factors, including differences in education and income and a legacy of discrimination. But distinctions in risk-taking and tolerance are also important, persistent—and often overlooked.

The Federal Reserve Board recently released its triannual Survey of Consumer Finances, the most comprehensive snapshot of American household balance sheets. Each report offers a sober reminder of the wealth differences between black and white households in the United States. Median net worth among white households is $181,000; for black households, it is just $20,700.

Following up on its promise to monitor racial economic disparities more closely, the Fed released a report on what’s behind the wealth gap. Differences in income account for much of it, and white Americans are more likely to inherit money or property, which can provide an important foundation for wealth accumulation. Also, white parents are more likely to help their children buy a home.

The survey also reveals that nonwhites are much less likely to own risky assets. Taking risk with one’s investments is the only way to grow wealth when interest rates are near zero, as they are now. The two most common ways to build a fortune are either to build a business or to participate in equity markets. About 60 percent of white American households own stock, compared with just 33 percent of black households. About 16 percent of white Americans own at least some share of a business, but only 4 percent of black Americans do.

Differences in income and educational attainment explain some of this, but differences in equity ownership persist across racial lines even among similar income groups. For instance, 84 percent of white American households earning between $100,000 and $150,000 own stocks, compared with 75 percent of similarly situated black Americans.

Most Americans invest in the stock market through retirement accounts. Among Americans with retirement accounts, 89 percent of black households own stock, compared with 94 percent of white households. Though black retirement-account participants are two years younger than white accountholders on average, whites tend to invest more of their money in equities than blacks do.

Expansion of 401(k) participation and automatically investing the accounts in balanced portfolios have closed much of the equity gap in retirement accounts in the last 15 years. Direct ownership of businesses, the other major source of portfolio wealth, is a more challenging problem. Economic research is divided on why black entrepreneurship rates are so low. Since the end of slavery, black entrepreneurship has flourished for certain periods, but various factors ranging from discrimination to lack of capital to migration patterns stalled the momentum.

Some scholars argue that lack of access to capital remains the main barrier to black enterprise. Others suggest that capital does not explain all of the difference, because a major factor in risk-taking is outlook—the belief that your business will be successful. White households tend to be more optimistic.

Here, the family component may come into play. The inheritance you get from your parents isn’t always just financial. Risk-taking tends to run in families. If you’re a business owner, odds are higher that your kids will be, too. Lower rates of entrepreneurship in the black community reflect years of discrimination and lack of access to capital. We live in a more equitable society today, but the legacy remains hard to overcome—even if we make capital more available through loan programs or other means.

Like many complex issues, racial disparity in household income and investment has multiple causes. While more can probably be done to offer financial support for black-owned businesses, more money won’t be a cure-all. Simply offering cash can’t close the gap. Risk-taking is the missing element: it is how fortunes are built and sustained.

Photo by Spencer Platt/Getty Images


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