Picture yourself logging into your investing app, greeted with a leaderboard, notifications that nudge you toward the “top-traded” stock, and colorful confetti animations that celebrate your first trade. It’s enticing, colourful and, well, fun.
But do inducements to trade lead to better returns and outcomes for investors? Or just more profits for brokerages?
Gamification, the use of game-like elements in non-gaming contexts, has made retail investing more accessible, especially to younger Canadians who might otherwise find traditional investing intimidating. Features such as points, badges, and social trading make the process more engaging and there’s something inherently satisfying about the instant gratification they provide.
Apps like Robinhood in the United States have set a trend that many other platforms are now following, integrating these features to boost user engagement.
But what’s the cost of all this fun? According to recent research by the Ontario Securities Commission (OSC), gamification techniques can significantly influence investor behavior, and not always for the better.
For example, in a study into gamification techniques published in 2022, participants who were rewarded with points for trading made almost 40 per cent more trades than those who weren’t exposed to such gamified elements.
In an update to the study released earlier this month, subjects shown a social media feed of other (fictitious) platform users talking about trades of certain stocks had a trading volume 12 per cent higher than the control group. Participants exposed to “copy trader” gamification (where you can elect to have your trades automated to follow another user’s trades) saw an 18-per-cent lift in trade volume.
This increased activity can be problematic, as the study authors note that frequency of trading has been documented to diminish investor returns in the long run. Gamification could potentially lead to under-diversification and excessive risk-taking, according to the OSC press release.
Research from FAIR Canada’s survey on do-it-yourself (DIY) investors, conducted earlier this year and released this month, provides further insights into how such investors approach investing. (Disclosure: I’m the chair of FAIR Canada.) The survey highlighted that many DIY investors rely on tools provided by their trading platforms, such as research reports, model portfolios and suggested trades. About 57 per cent of DIY investors who used tools offered on their platform reported buying or selling a specific investment as a result, suggesting that automated suggestions can influence trading decisions.
The survey also found that a significant portion of DIY investors are not fully aware of the fees they are paying, with 41 per cent reporting they don’t know how much they paid in fees in 2023 for their DIY accounts. The report asks if gamification is an aspect investors, industry, and regulators should be thinking more about as the study found tools and features offered by DIY platforms influencing investor decisions.
All of this is not to say that gamification is inherently bad. The key issue lies in balance and transparency. Properly applied, gamification can educate and motivate investors to save and invest in ways that align with their goals. For example, platforms could use game elements to encourage better financial behaviors, such as achieving a diversified portfolio or holding investments for longer. But as the OSC’s research makes clear, many current applications are designed to drive engagement at all costs, even if it’s not in the investor’s best interest.
The shift towards DIY investing, as highlighted by FAIR Canada, emphasizes the importance of investors understanding their own risk tolerance and investment goals. With DIY accounts becoming more popular, growing from 2.3 million in 2020 to 11.4 million by late 2023, it’s evident that more Canadians are choosing to take control of their financial futures. However, this trend also underscores the need for better investor education, particularly around the risks of gamification and the potential pitfalls of overconfidence.
Regulators are paying attention. There are ongoing discussions about whether digital engagement practices should be curtailed, especially those that promote excessive risk-taking or turn investing into something akin to gambling.
It’s important for investors to also stay aware of how these techniques influence their behavior and to remember that when it comes to your financial future, the slow, steady but often boring approach is typically the most rewarding.
Ultimately, gamification in retail investing is a double-edged sword. It can democratize access to markets and make investing more engaging, but it can also encourage behaviors that may not align with sound financial planning.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.
