Financial Behavioral Health and Investment Risk Willingness: Implications for the Racial Wealth Gap

Background. Financial behavioral health (FBH) is a relatively new concept and is defined for this study as comprising financial precarity, financial self-efficacy, and financial well-being. FBH influences numerous domains, including mental health. Research suggests anxiety can impact investment decisions and investment risk willingness impacts wealth accumulation. As such, FBH may have the potential to influence investment risk willingness and thereby wealth levels. When considered in the context of the racial wealth gap, the experience of FBH by racial group is unknown and findings of difference between Black and White investors’ risk willingness are mixed. The study’s aims are to establish an FBH measure and explore its application in a racial wealth gap context.

Method. The study used data from FINRA’s 2018 National Financial Capability Study. A combined subset (n = 24,124) was used, comprising Black respondents (n = 2,835) and White respondents (n = 21,289). Reported financial anxiety levels were M = 4.51 (SD = 2.02; from 1 to 7, with higher as worse anxiety) and investment risk willingness levels were M = 4.91 (SD = 2.68; from 1 to 10, with higher as greater willingness). For the FBH measure, 19 items were identified for analysis through an exploratory (EFA) and confirmatory factor analyses (CFA) piecewise modeling approach, in which FBH was a second-order latent variable to measures reflecting financial precarity, financial self-efficacy and financial well-being. Application of FBH on investment risk willingness used structural equation modeling (SEM) with the lavaan package for R, employing the WLSMV estimator.

Results. The study attempted to determine how a subset of Black and White survey respondents experienced FBH differently, according to relatively collectivist or individualist financial values. It was found through measurement invariance testing that although the FBH model had an excellent fit for White respondent data (χ2 = 6400.366, df = 140, p < .001; SRMR = 0.04; CFI = 0.997; TLI = 0.996; RMSEA = 0.051, 90% CI [0.05, 0.052]), it was variant, poorly fitting the data from Black respondents (χ2 = 5851.964, df = 140, p < .001; SRMR = 0.127; CFI = 0.952; TLI = 0.941; RMSEA = 0.141, 90% CI [0.138, 0.145]). The SEM analysis determined that, controlling for key demographic characteristics, FBH accounted for 37% of the variance in investment risk willingness (R2 = .368; β = 0.256, p < .001). Racial group affiliation was a negligible predictor of investment risk willingness (β = -0.084, p < .001).

Conclusions. The project contributes an empirical basis for FBH. The variance between the sub-groups may indicate that the survey questions are inadequately capturing the collectivist experience by which many people treat their finances. The project shows how finances can have a psycho-behavioral impact on well-being and decisions, the influence FBH has on investment risk willingness, and that racial difference in risk willingness is an unlikely contributor to the wealth gap.