Risky Play: Trading Platforms Are Gaming Investors Into Bad Decisions

Investors may be nudged to take more risks.

It has never been easier to trade, thanks to ubiquitous online zero-commission trading platforms. The US online trading market is projected to exceed $4 billion by 2029.

On the one hand, this is great news. Stock ownership is positively associated with building wealth and financial awareness, and online trading platforms are leading the charge to find new ways to attract new investors. On the other hand, the introduction of gamelike elements such as leaderboards, badges, and points may be encouraging “gambling” behaviour and leading investors to take on riskier choices.

Gamified Trading

Trading platforms are incentivized through payment for order flow, or PFOF, and advertising revenues to keep investors engaged and trading more frequently.

To achieve these goals, not only have platforms made trading seamless, but they have also introduced gamelike elements to take the fear out of investing and entice novice investors. These features have the added benefit—for the platform, that is—of keeping users trading. The more you trade, the greater the trading value, and the higher your gains, the more positive reinforcements you get in the form of points, badges, and celebratory messages. The problem is consumers are getting caught up in playing the game.

Research shows that people can be negatively influenced by these types of features. Gamified elements are linked to more-frequent trades, speculative herding, and, subsequently, poor returns. Even more worryingly, these features are linked to riskier behaviours such as using higher leverage, trading larger amounts, and selecting riskier stocks.

In recent research, participants in a simulated gamified trading app environment were more likely to invest in risky stocks compared with those presented with a nongamified app. These participants were driven by their goal to win the game or move up the leaderboard, which prompted them to ignore their risk preferences and make riskier choices.

Gamified trading platforms are nudging consumers toward choices they otherwise would not make. Many investors may be distracted by the gamelike features that blur the lines between investing and gambling. In a UK survey, one participant stated that the app “feels more like a sports betting app.”

Gamifying to Invest, Not Gamble

Regulators in the UK, EU, US, Australia, and Canada are taking note, issuing new warnings on design features that may lead consumers to act against their own interests, regulating in-app prompts as advice, and even calling for a ban on PFOF. But until these concerns are addressed through the regulatory system, investors must protect themselves by being aware of how their own behaviours are affected by gamelike features.

When used properly, gamelike features have the potential to help investors. They can generate interest in sound investing and wealth building, even though the rewards may be many years away.

If implemented mindfully, nudges and gamified design elements can motivate actions that drive better outcomes for investors. Such elements include:

• Rewarding points for getting closer to target goals.
• Assessing risk preferences using robust tools rather than assessments that encourage consumers to associate investing with gambling.
• Sending reminders to contribute to savings plans.
• Creating virtual portfolios to simulate market movements and better understand risk and composure.
• Building communities to share advice and experience.
• Giving badges for completing learning modules.

Investors can have fun and make informed investing choices; the two are not mutually exclusive. While many trading platforms currently seem to be designed to encourage frequent trading and other risky behaviour, that does not have to be the case. These platforms have tremendous influence. If they use gamelike features properly to promote positive outcomes, they can transform retail investing for the better.

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