Exclusion to Equity: Privilege and Bias in Investment
In the United States, more often than not, privilege intersects with race, gender, ethnicity and class, creating significant disparities in investment opportunities. Wealthy white male investors benefit from systemic advantages, including intergenerational wealth, education opportunities, and a historically exclusive financial industry, while marginalized communities including people of color, women, immigrants and middle class workers, face systemic barriers that impede their ability to participate in and benefit from investment opportunities.
Access to quality education is a fundamental determinant of financial literacy and investment knowledge. Marginalized communities are disproportionately affected by inequities in education, which can start as early as Pre-K. According to the Economic Policy Institute, “Black and Hispanic children are significantly less likely to attend high-quality early education programs, which impacts long-term academic and economic outcomes” (EPI, 2020). Financial literacy is rarely prioritized in underfunded schools, leaving many individuals unaware of basic investment vehicles such as stocks, bonds, and mutual funds. In contrast, affluent families often have the resources to provide their children with private education, tutors, and early exposure to financial concepts. That creates a knowledge gap that persists into adulthood, limiting the ability of marginalized groups to make informed financial decisions or explore different investment vehicles.
Investing offers various pathways to grow wealth, but understanding these options is crucial. Stocks involve buying shares (a very small piece of a company), allowing investors to own a bit of that business but it can be risky because it is very possible to lose a lot of money, that said there is a chance to gain a lot of money too. Bonds on the other hand are very low risk because you essentially loan your money out to a bank, or government, with an assurance you will get it back, most likely with interest. Mutual funds pool money from multiple investors to invest in a diversified portfolio, like a lot of different stocks and bonds, with reduced risk. For marginalized communities, these options can seem out of reach due to systemic barriers like a lower disposable income, limited access to financial advisors, along with discrimination in financial institutions.
Racial and gender biases further exacerbate the inequalities in investing. Wealthy white investors often benefit from old boys’ networks, where informal relationships facilitate access to capital and other opportunities for investment. Meanwhile, investors from marginalized backgrounds encounter biases that limit their access to resources. For example a study highlighted in Forbes revealed that “Black entrepreneurs receive less than 1% of venture capital funding, despite owning 10% of U.S. businesses” (Simon, 2019). Such discrepancy stems from ingrained stereotypes and a lack of representation in the financial world. Women also face significant hurdles. They are often stereotyped as risk averse, leading to fewer opportunities for funding. In reality, studies show that women led businesses often outperform their male led counterparts (Mehta, 2023) in terms of ROI (return on investment), yet they remain underfunded. “Impact investing can play a role in addressing these inequities by channeling resources toward underrepresented groups,” according to Cambridge Associates.
Investing, like economics in general, is not an exact science. While financial models and strategies play a role, investment decisions are also heavily influenced by human psychology, emotion, and behavioral biases. Fear of risk and societal norms about wealth and class, often shape how people approach investing, all of which disproportionately affect people in marginalized communities. At the same time, systemic racism, sexism, etc. restrict access to financial opportunities, making it difficult for historically marginalized groups to participate and take advantage of wealth building opportunities.
The long term impacts of being shut out investing is particularly damaging because of the power of compound interest. The earlier someone starts investing, the more their wealth can grow overtime. However, systemic barriers can delay or prevent marginalized individuals from entering the market, leaving them unable to benefit from investing and building wealth. That creates a cycle where people who have privilege accumulate wealth and then pass it down and it starts again, and those who are at a disadvantage, struggle to begin the cycle. Consequences of that cycle go beyond individuals or families but extends to communities as a whole being able to invest in their communities schools, sports, and more.
Broker bias is another way that inequality in investing occurs. Financial advisors and brokers often prioritize high-net-worth clients, leaving middle-class investors–particularly those from marginalized communities–without access to personalized guidance. When they do engage with financial institutions, these communities may encounter subtle or overt discrimination. A report by the Global Impact Investing Network (GIIN) states that “racial bias in financial services results in limited access to credit, higher fees, and fewer opportunities to build wealth” (GIIN, 2023).
Efforts to address these disparities include impact investing, which intentionally directs capital towards underrepresented ground. According to Impact Entrepreneur, “impact investing can challenge systemic inequities by funding ventures that prioritize diversity, equity, and inclusion” (Impact Entrepreneur, 2023). Additionally, increasing representation in decision making roles within financial institutions can help dismantle bias and create more inclusive workspaces.
The divide between privileged wealthy while male investors and marginalized communities underscore the need for systemic change. Addressing educational inequalities, increasing financial literacy, and combating biases in the financial sector are critical steps toward creating an equitable economy. By understanding and addressing these disparities, society can work toward an investment landscape that offers opportunities for all, regardless of race, gender, ethnicity or socioeconomic class.
Sources
Portal Notes, KHS
Impact Entrepreneur. Tackling Racial Bias and Marginalization Through Impact Investing. Impact Entrepreneur, https://impactentrepreneur.com/product/tackling-racial-bias-and-marginalization-through-impact-investing/
Global Impact Investing Network. Shifting Power by Addressing Racial Bias and Ensuring Equitable Representation and Decision-Making. GIIN, https://navigatingimpact.thegiin.org/strategy/re/shifting-power-by-addressing-racial-bias-and-ensuring-equitable-representation-and-decision-making/
Simon, Morgan. “Racial Bias in Investing? Just Look at the Data.” Forbes, 24 Sept. 2019, https://www.forbes.com/sites/morgansimon/2019/09/24/racial-bias-in-investing-just-look-at-the-data/
Cambridge Associates. Social Equity Investing: Righting Institutional Wrongs. Cambridge Associates, https://www.cambridgeassociates.com/insight/social-equity-investing-righting-institutional-wrongs/
Garcia, Emma, and Elaine Weiss. Education Inequalities at the School Starting Gate. Economic Policy Institute, https://www.epi.org/publication/education-inequalities-at-the-school-starting-gate/
Wikipedia. “Old Boy Network.” Wikipedia, https://en.wikipedia.org/wiki/Old_boy_network.
Mehta, Kavit. “Why Women Entrepreneurs Outperform Men.” Forbes, 13 Nov. 2023, https://www.forbes.com/sites/kmehta/2023/11/13/why-women-entrepreneurs-outperform-men/