Fintech startups have long used gaming techniques to make investing more engaging for consumers, but there is increasing worry these techniques may be having negative effects on investors.
A randomized experiment involving more than 600 participants found that so-called gamification techniques, such as achievement badges and encouraging messages for completing trades, encourage investors to take higher risks than they would on a non-gamified platform,
“In the context of retail trading apps, particularly those involved in payment for order flow agreements, the goal is to maximize engagement, i.e., trading activity,” Marius Zoican, an assistant professor of finance at the University of Toronto and one of the researchers, told Financial Planning in an email. “This is typically not optimal for individual investors who may take on too much risk or trade too often relative to a passive long-only strategy.”
Gamification techniques are attracting regulators’ attention. In December, attorneys representing Massachusetts Secretary of the Commonwealth William Galvin argued that
"While new technologies can bring us greater access and product choice, they also raise questions as to whether we, as investors, are appropriately protected when we trade and get financial advice," Gensler said at the time. "In many cases, these features may encourage investors to trade more often, invest in different products or change their investment strategy.”
Financial advisors are seeing the impacts of gamification among clients. Some get a “fear of missing out,” or FOMO, when reading headlines about high-flying stock prices during the last year, said Ryan Ortega, the founder of Third Line Financial Planning. Others receive notifications when asset prices go up or down, causing them to check their accounts more frequently and initiate trades, said Thomas Kopelman, co-founder of AllStreet Wealth.
Both Ortega and Kopelman stress to clients the importance of long-term investment strategies and broadly diversified portfolios. For clients who want to actively trade, they encourage them to use only a small percentage of their assets.
But the trend toward gamification could be having a deeper impact on client behavior that could negatively impact the advice industry down the road, said Chris Diodato, the founder of WELLth Financial Planning.
“For instance, somebody starts trading on Robinhood, with their stimulating casino-like interface, and they believe that investing is like playing slots and maintain that notion long-term,” Diodato said in an email. “I’ve had a number of prospects of all ages come to me asking if I could day trade for them. It takes a lot of education to walk these folks down from the notion that investing is synonymous with playing the lottery.”
The impact of gamification can be moderated by financial literacy and experience, Zoican’s research found. Following eight rounds of trading, participants in the study were asked to complete a financial literacy quiz. A one-standard deviation increase on the quiz score led to a 56% reduction in the impact of gamification.
While encouraging financially illiterate investors to engage in risky moves like option trading can obviously be harmful, an app that strikes the right balance between education and access to markets can use gamification to get more consumers into the stock market, said Matt Paronish, founder of the Fire Financial Group.
“Robinhood has done a great job at attracting the younger client in the early stages of investing,” Paronish said. “Since they have this young and inexperienced market, they simply need to focus on education and vetting clients for certain types of trading.”
A separate
Some wealth management firms are also using gamification to enhance client and advisor relationships. For example, Edward Jones has an app called My Priorities that gamifies the financial goal-setting process to assist conversations.
“We offer financial planning tools that deepen the discovery process for our clients and financial advisors. We do not offer online trading,” said an Edward Jones spokesperson when asked about how the company uses gamification and concerns that it could be used to encourage risky decisions. Edward Jones also supports the SEC’s focus on investor protection, the spokesperson said.
Zoican acknowledged that gamification elements can be used to encourage positive behaviors, such as nudging people toward saving more.
“I think the takeaway is that one cannot assume all gamification in finance is good or bad, but has to look deeper into what the incentives of the platform are,” Zoican said.
However, some feel gaming just has no place in investing. It isn’t always obvious when an investor has made a life-changing mistake, and most investors lack the time, will, discipline and skill to manage their own money, according to Blaine Thiederman, the founder and principal advisor of Progress Wealth Management.
“Making it feel like a game drastically over-simplifies the complexity of trading stocks,” Thiederman said. “There is absolutely no benefit to society as a whole for any company to gamify trading stocks. No more benefit to gamify trading stocks than there is to gamify doing surgery or doing deadlifts.
“This is serious stuff, and it deserves to be treated seriously,” he said.
