In the frothy days of meme-stock trading, when fortunes were seemingly made and lost in a matter of months via frequent online trading of hot stocks like GameStop, investment gamification came under scrutiny.
We at CFA Institute (opens in new tab) do not regard stock trading as a game. We recognize, however, that this style of trading, ushered in largely by the next generation of investors, is likely here to stay. In response, we issued a new report on investment gamification (opens in new tab), and while we see some real downsides to gamification, we find some positives, too.
Alongside the use of behavioral techniques and the rising influence of social media, investment gamification can be a powerful tool for increased investor engagement and literacy. On the flip side, gamification can potentially be used by firms to drive excessive trading by retail investors, encourage trading in complex or risky products or promote other harmful investor behaviors.
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Let’s take a look at some pros and cons of gamification and behavioral nudges, starting with five pros:
Improving financial literacy. Younger generations will increasingly need to take charge of their own financial futures, and this requires financial literacy. Young people must be well educated about financial matters to make what are very consequential decisions. Starting and funding a 401(k) early in one’s career, for example, represents a clear path to financial security in retirement.
Having a pleasing and helpful user experience can help investors educate themselves. Gamification with intuitive app design and a visually appealing presentation can get the attention of people when it comes to content focused on long-term planning and financial literacy, for example.
The democratization of investing. For many young people, financial markets can appear far too complex and impenetrable; online trading breaks down these barriers. There are clear benefits of gamification in terms of learning about the capital markets and investment strategies through simulation platforms. Being able to model transactions before they occur, for example, provides real benefits.
And while the riskiness of gamification-driven investing clearly exists, young people are better suited to take risks early in their investing careers — time is your friend in the markets — when done so in a responsible manner.
Shareholder activism. Our research shows that many Gen Zers and younger Millennials care deeply about the corporate performance of their investments — a company’s environmental or ESG record, for example. Groups of investors can now direct their collective clout toward a company’s practices and indeed influence them in some instances via social media outlets.
Digital nudges. I’ll cover this topic in more detail when we get to the cons, but not everything about a digital nudge — such as a pop-up or a text reminder to spur an investor to take action — is negative: “Have you reviewed your asset allocation?” or “Your portfolio is heavily skewed toward risky assets; you may want to review it” are but two examples of a digital nudge that might prompt an investor to take action for their own benefit.
Reducing account friction. It used to be that opening a financial account meant signing dozens of pages of documentation in person. Now opening an online account is much, much simpler. Consumers are turned off by activities with high barriers to entry; making an account simpler to open can bring more people into the financial ecosystem.
The more people who take an active interest in their financial future and start investing at an early age, the better. Reducing friction at the entry point can surely help.
And now we must turn to five cons about the gamification trend.
Lack of clarity (or even visibility) of disclosures. To the last point on the pros of reducing account-opening friction, this cannot come at the cost of proper disclosures. We all know how time-consuming it can be to read the fine print. We are seemingly conditioned to accepts terms and conditions without looking at them.
Our research found that this can be exacerbated online. Burying important disclosures or presenting very lengthy information on a screen in a vertical or portrait format can cause readers to skim through the information.
Further, disclosure design must be optimized for mobile devices. And putting them at the point of transaction — before a trade — can help users pay attention to important terms.
Digital nudges and instant gratification. In short, getting constantly prompted or “rewarded” may encourage excessive trading. Many online platforms rely on heavy trading by their users to generate revenues. Confetti and other celebratory feedback after placing a trade may look nice on a screen, but superficial gratification is no way to drive an investing strategy. Firms that employ such tactics need to tone it down. Beware.
Social media hypesters. Promoting dubious investments is sadly an activity as old as the markets. Given the rise of social media, this practice is easier than ever. Be wary.
Reputable investment firms employ highly trained professionals (yes, I’m thinking of CFA charterholders (opens in new tab)) who perform robust research on investment opportunities. Someone with a Twitter handle like @buystockXYZ probably does not fit that description and may have an ulterior motive — a conflict of interest — that runs counter to the end investor. Get your research from people and brands you trust.
Allow time for reflection. One-click buying may function well for online shopping, but making an investment choice represents a different proposition. We think an order, review and confirm process can introduce a little needed friction and time for reflection without harming the user experience.
One-click buying works for ordering more toothpaste, but we believe a minute more of contemplation would serve investors well before making a trade.
Downplaying risks. All investments contain risk. Making trading fun and easy does not remove risk; in fact, it can increase it, as we have discussed. Online platforms may not make this apparent or bury it in the fine print. The meme-stock craze cost some people their entire savings. Today’s hot stock can be tomorrow’s black swan. You should not invest more money than you can afford to lose.
Gamification in investing has clear pros and cons. The industry should develop and enforce policies that support positive investor experiences. We at CFA Institute support innovation, but with appropriate safeguards. Gamification, when misapplied, may fuel mistakes among inexperienced investors. The right balance is essential.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab).