The confetti celebrates something more sinister than your trade
Recently, the discount brokerage Robinhood decided to get rid of one of its unique (at the time) features — the confetti celebrating an investor’s first trade and other firsts.
It did so in the face of mounting criticism that Robinhood has been ‘gamifying’ trading for young first-time investors, getting them to behave in a way that could be detrimental to their pockets. It is not just me who’s saying it, it’s also the Massachusetts Securities Division, who filed a complaint against the company alleging, among other things, its use of gamification strategies to manipulate customers into following investing strategies that they were not experienced enough to follow.
But what exactly is gamification and how is Robinhood using it to manipulate your trades?
Gamification — Life is a game!
This basically means using gaming mechanics like points, levels, awards — and confetti graphics, to make boring tasks (like trading/investing) more fun.
A good example is the Pokemon Go phenomenon, which encouraged players to complete fitness goals like walking a particular distance in order to advance in the game.
Gamification strategies are increasingly prevalent in sectors as diverse as fitness, education, and even professional spaces to motivate employees into doing their dreary jobs.
The Sinister Side of Gamification
All of these things are good, aren’t they? If people are motivated to eat healthier, study better, walk more, even if it is by treating full-grown adults like children in a life-sized game, there can’t be anything to complain about, can there? The ends justify the means.
But when a tool has a use, it also has a misuse. And like all good things, gamification also crossed over to the dark side. No longer were we being manipulated ‘for our own good’ — it was now time for the capitalist’s good.
Take the example of Disneyland Resorts, California. They implemented an electronic leaderboard with a traffic light theme that tracked the performance of laundry staff (Red meant employees were behind in meeting management’s goals, yellow that they were slow, and green that they were hitting their targets). As could be expected from such a ‘race-to-the-botttom’ system, reports came out about workers who skipped bathroom breaks to keep up and pregnant women who had trouble meeting targets.
Gamification is an excellent way to get people to behave the way the system wants — whether that is good for the people involved or not.
Robinhood and Its Strategy
Robinhood burst into the investing scene in 2013, when it became the darling of young, first-time investors by charging zero commission on trades — but more importantly, by importing a para-social experience into the boring, run-of-the-mill, and drab world of stock trading, hitherto dominated by the Charles Scwabs and the Fidelitys.
How exactly did they gamify trading though? These are some examples of how Robinhood successfully incorporated gaming strategies to encourage investments:
- The app sends push notifications in order to push investors into trading on their app.
- Milestones like the first trade are celebrated using confetti animation.
- Investors can snag a share of a high-price glamour stock such as Apple Inc. if they get a friend to sign up, importing their social circles into their platform.
- They can browse the 100 most-held stocks among fellow users, for some much needed social validation.
- They have successfully managed to capture eyeballs on other platforms like TikTok — videos under #robinhoodstocks have millions of views.
- They have also spread the virus — eToro has a leaderboard for top performing investors whose trades can be copied by others, as well as live chat functionality.
Why Trading is Bad for Investors
So what if Robinhood is leading to a trading addiction amongst investors? Isn’t that a good thing?
Well no. Investing is good, trading not so much.Those who trade more make much less than the market as a whole returns (through an index fund).
The same paper published in the Journal of Finance, also pinpoints the primary reason for such high trading levels and the resulting poor performance of individual investors — overconfidence.
Unfortunately for millenials, a TIAA study stated 62% of millennials assess their own financial knowledge as high or very high; however, only 19% of these respondents could answer the three financial literacy questions correctly.
And who uses Robinhood? Well, in 2015, 80% of its customers were millenials, and the average age was a mere 26 years. It might have expanded its user demographics by now, but it is safe to assume that most users are young and relatively inexperienced investors.
Let us add all these facts together :
Robinhood encourages (manipulates) its young users, who are relatively inexperienced but overconfident, to trade frequently, leading them to make even lower returns than passive index funds.
The problem is apparent.
The Way Forward
Although they have ridden themselves of the juvenile confetti, Robinhood is still extremely insidious in its methods to encourage frequent trading, which usually benefits them more than its users.
However, there is also a case for them being a business and profit being a valid motive.
It is now up to the regulators to ensure that the delicate balance between capitalistic desires of profit-making are balanced with the need to protect young investors who likely cannot afford the hits to their returns.
The end of the confetti may just be the beginning of the party.
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