What happens when online investment trading platforms start looking like video games, with badges and exploding confetti to keep users hooked?
For experienced investors, not much changes. Research from the University of Toronto, involving almost 1,000 volunteers in mock investment scenarios, shows that features like price alerts might even help skilled investors execute their strategies more effectively.
Gamified investing
Gamified investing didn’t lead to more mistakes or a lot more trading either; trading increased by just 5%, with less than a third of that due to gamification.
But it’s a different story for beginners. Using two lab-built platforms—one basic and one featuring rewards and information like those on popular gamified sites such as Robinhood and eToro—researchers found that novices preferred the reward-based setup. This preference led to a 12.5% increase in trading compared to the basic version.
The gamified environment also reinforced bad strategies, like holding onto losing investments and selling winning ones. These investors were nearly 32% more likely to sell after a price increase alert and nearly 38% more likely to hold after a price drop alert, compared to their actions without these alerts. In contrast, savvy investors did the opposite, being 36% more likely to buy after a price increase alert.
“Neutral” investment platforms are best for self-directed investors because their features don’t influence decisions. While the general advice for amateurs is to buy index funds and mostly ignore them, gamified platforms push users towards more frequent trading, benefiting the platform financially.
“This is especially troubling if gamified platforms attract young, inexperienced traders who are more likely to be swayed by ‘fun trading’,” the researchers explain.
Regulators have been paying more attention to gamified trading platforms recently, worried that they may lead users to make poor financial choices. In response, the U.S. Securities and Exchange Commission introduced new rules in July 2023 to eliminate potential conflicts of interest in the algorithms used by these platforms.
Still, regulators need to be careful not to stifle innovation while ensuring ethical practices in online trading.
“I think the best solution is to improve financial literacy for everyone, which would make investors less susceptible to these behavioral nudges,” the authors conclude.
