The most important element in creating wealth is investing in assets that provide income. Stocks primarily form the foundation of many retirement accounts. Regretfully, in 2021, roughly 56% of Americans owned stocks.
Robinhood has attempted to promote more stock market participation by incorporating game-like elements into its trading software. It operates in this manner to promote the goal of “making finance accessible to everyone.”
While it sounds great, the gamification of investing encourages tactics that work better for brokerages than for investors. This is all the information you need to understand the procedure, including how it operates, why it’s risky, and how to stay safe.
What does investing gamification entail?
Adding features to investment apps that improve the user experience by making it more interesting, intuitive, or aesthetically pleasing is known as the “gamification of investing.” The goal is to make trading stocks more enjoyable for the customer, like playing a video game.
On the other hand, imagine a dull black-and-white screen covered in financial jargon and unintelligible indicators. Such a user interface, daunting to those unfamiliar with it, is likely to deter potential investors.
An approachable and friendly investing app may seem like a beneficial thing. In theory, it might be helpful, but there are certain limitations. In reality, many gamification elements border on deception and manipulation, which can diminish the experience.
Because of this, the practice has drawn criticism, and authorities are stepping in. The public was formally asked to provide feedback on investing gamification and “digital engagement practices” by the Securities and Exchange Commission (SEC).
The Financial Industry Regulatory Authority (FINRA) has indicated that it would like to follow suit. Both agencies wish to determine whether regulatory action is required to safeguard consumers from the dangers these practices pose.
In a more severe move, Massachusetts Commonwealth Secretary William Galvin accused Robinhood of utilising “aggressive tactics to attract new, often inexperienced investors” and “gamification strategies to encourage and entice continuous and repetitive use of its trading application.”
The mechanism of investing gamification
The risks associated with investment gamification are difficult to convey as a mere theoretical concept. Let’s examine some of the real procedures that platforms like Robinhood are putting in place to bring things a bit closer to reality.
The notorious confetti feature of Robinhood was one of the warning signs that initially raised awareness of the gamification problem. Earlier iterations of the programme reinforced the notion that every deal was a cause for celebration by letting confetti fall across your screen after each trade.
In actuality, increasing the number of trades you make is an excellent way to lose money. The average investor is frequently far better off adopting a less aggressive investing strategy, and stock traders nearly always lose.
The animation received so much negative feedback that Robinhood eventually took it off its app. Ironically, they completely missed the meaning and substituted floating geometric designs for the confetti.
The financial services sector faces heavy regulation for good reason. People frequently risk losing the money they use to pay for their children’s education, put food on the table, and fund their retirements.
Disclosure requirements are a major component of such legislation. For this reason, payday lenders must disclose that their prices are not long-term viable, and publicly traded corporations must provide disclaimers with their financial statements.
Unfortunately, playful game-like interfaces rarely accommodate these kinds of acknowledgements. In a world where individuals rarely read terms and conditions, this poses a significant risk. Customers are unlikely to take important information seriously unless providers make it easily accessible.
Prioritising trending stocks
The emphasis on trending stocks is among the most hazardous aspects of gamification. Apps frequently show the stocks with the biggest price changes, whether positive or negative, much like you would see the top ten scorers in a competitive video game.
These lists funnel investors into a volatile handful of stocks that are far from guaranteed to be profitable, even though there are many investment options available today. Indeed, they are frequently the most overbought equities on the market.
These lists encourage terrible investing practices, particularly among younger investors who are more susceptible to manipulation. In their constant pursuit of the newest and most exciting opportunities, they may end up investing heavily in a stock simply because it moved more than others that day.
Research has shown that attention-induced trading negatively affects Robinhood users. The top equities bought every day had a dismal average 20-day return of -4.7%.
Lottery rewards
These apps use lottery systems to encourage behaviour that may not be optimal for you. They can further numb users to the hazards involved by making the experience feel more like gambling than investing.
“For instance, I recently received an email from Coinbase regarding their most recent sweepstakes. Eight lucky winners will receive prizes totalling $500,000. You only need to make a trade of $100 or more to be eligible for the sweepstakes,” Certified Public Accountant Nick Gallo wrote in a blog for Finmasters.
Even though you have little chance of winning, it’s still a tactic to persuade you to trade more frequently, particularly if you’re a novice trader afraid to start. Of course, buying or selling will cost, but they don’t mention that.
It’s time to address the core of the issue. Why do regulators suspect that these gamification approaches drive less than honourable goals? And what weakness are these strategies aiming for that makes them so sneaky?
Maintaining independence from clients to prevent conflict of interest is a major concern in the auditing industry.
The financial sector needs to be regulated to manage competing interests, as people often prioritise maximising their profits when money is involved. This issue is evident in the broker-investor relationship, where their interests sometimes conflict. The broker’s most profitable approach is often the investor’s least profitable, and vice versa.
This was previously the case with commissions; brokers received a payment for each trade, motivating them to encourage frequent trading. However, this increased the likelihood of investors losing money, as short-term stock trading is difficult and long-term stock trading is almost impossible.
A study of eToro users showed that 80% of active traders lost money, with an average return of -36.3% over 12 months. Additionally, if someone receives benefits from a company, they may be biased in their assessment of the company’s financial statements, as there is a financial incentive to endorse them.
The order payment flow model
On most modern free trading platforms, trade commissions are no longer a concern. But because of the contentious paying-for-order-flow mechanism, the broker-investor conflict of interest still exists. In the simplest terms possible, this is how it operates.
A third-party “market maker” receives your request when you place an order with Robinhood. By facilitating the transaction, the market maker makes money off the discrepancy between Party A’s purchase price and Party B’s sale price. The market maker then gives Robinhood a share of those gains.
“Let’s say you wish to sell a portion of your Stock A holdings. You place the order through Robinhood, and they forward it to a market maker. The market maker simultaneously sells one of your shares to another party for $100.10 and purchases yours for $100. After keeping $0.10 for themselves, they reimburse Robinhood $0.03 for shipping your order,” Gallo explained.
This method generates about 80% of Robinhood’s profits. Although it enables commission-free trading, it has drawn criticism for creating several conflicts of interest between investors and brokers. The most relevant aspect of this issue is that it incentivises brokers to increase trading volume.
“Order flow payment is sufficiently troublesome that the SEC may decide to outright prohibit it. I would be negligent if I did not mention that one of its most prominent and early proponents was the notorious Ponzi schemer Bernie Madoff,” Gallo noted.
Targeting younger investors
Targeting vulnerable groups is a defining characteristic of predatory financial strategies. Payday lenders establish themselves in low-income areas, internet scammers prey on the elderly, and gamification strategies target younger investors.
As you can imagine, video game players are typically not affluent homeowners in their 50s and 60s. Around 21% of video game players are younger than 18 years old, and 38% of gamers are between the ages of 18 and 34.
Since the audience is most accustomed to certain interfaces, gamification approaches work very well with them. You won’t be surprised to hear that, with a median age of 31, almost 40% of Robinhood users are between the ages of 19 and 34. Those figures seem uncannily similar.
Regrettably, young individuals inherently lack investment experience. Brokers that wish to promote active trading will find them ideal targets when you mix their inexperience with the greater risk tolerance that results from a lengthy time horizon and the bravado of youth.
How to guard against manipulation
Businesses and individuals will continue to use deceptive methods to take advantage of your need to invest, even if regulators take action to stop the gamification of investment. In the end, you alone can be in charge of your own safety.
Gallo, while comparing financial predators’ market behaviour to that of a pack of wolves pursuing the slowest deer in the herd, said, “There are numerous ways to be vulnerable, but one of the easiest to take advantage of is ignorance. One of the best ways to avoid manipulation is to learn about the most reliable investment methods and the most popular asset classes.”
A person who is aware that active trading is extremely risky, for instance, has already protected themselves against the main hazard that the gamification of investing presents. Your confidence in your capacity to make wise judgements will grow as you gain more knowledge about investing, and predators will find it increasingly difficult to defraud you of your money.
“It’s a marathon, not a sprint” is a common saying in the banking industry. That is true for a lot of things, but nothing more so than investing, where discipline, patience, and consistency are essential.
Think about the stock market, for example. Examining the returns of the S&P 500 Index in any given year reveals terrifying volatility. In 1974, it fell 8.78%, and in 1975, it increased by 37%. In 2008, it fell 36.55%, but in 2009, it rose 25.94%.
You don’t have a fantastic chance of selecting a winning year. Even worse are your chances of selecting a winning day, week, or month. However, the risk decreases if you adopt a longer-term outlook.
Over a five-year horizon, the top returns reached 30%, while the worst returns fell to -6.6%. Over ten years, returns ranged from a high of 20% to a low of 3%. For a 15-year period, the best returns were 15%, whereas the worst stood at 3.7%. Finally, over a 20-year span, returns varied between 18% at their peak and 6.4% at their lowest.
As you can see, the longer you remain committed, the higher your chances of success. When choosing an investment strategy, keep that in mind and be wary of other offers.
The thing that will most likely destroy you is making rash judgements when you have a solid understanding of investment and have developed a wise long-term plan. That usually means becoming fearful or greedy. For instance, the excitement surrounding the newest and best cryptocurrency is too alluring. Despite your inability to resist, you invest in it right before the bubble bursts.
“You sell everything before the market bottoms out because you’re afraid of missing the ride back to the top when the stock market crashes. These are ancient stories. The dread of missing out or losing what we have created can affect anyone. I’ve discovered that avoiding these traps completely is the best approach to keep yourself from falling for them,” Gallo added.
When the stock market is collapsing, don’t watch your asset balances decline because it will simply make you angry. Be careful who sells you items, because they may be too nice to pass up.
The rise of trading apps like Robinhood has opened the stock market to millions of new users, but it has also changed how people think about investing. By turning trading into a game, these platforms make risky behaviour seem harmless and even fun.
The problem is that frequent trading usually benefits brokers more than investors. True wealth grows through patience, education, and steady investment, not through chasing trends or prizes. Investors should be careful, stay informed, and remember that financial success takes time. The safest strategy is to understand the market and avoid being guided by excitement or fear.