Why gamified investment apps are risky for beginners
A recent study from the University of Toronto suggests that gamified investment platforms, which mimic games and offer rewards to maintain user engagement, could pose risks for inexperienced investors. The research involved nearly 1,000 volunteers participating in simulated investment scenarios. The study found that while experienced investors could potentially benefit from additional informational features like price change notifications, novice investors with limited knowledge faced different outcomes.
Gamification's impact on trading activity and strategies
The research revealed that gamification did not significantly increase trading activity or lead to more mistakes. However, inexperienced investors traded 12.5% more frequently in a rewards-based environment compared to a basic platform. The study also found that the gamified setting seemed to encourage poor investment strategies, such as holding onto losing investments and selling high-performing ones.
Expert's concern over gamified investment platforms
Mariana Khapko, a researcher involved with the study and an Assistant Professor of Finance at the University of Toronto, expressed concern over gamified platforms influencing users toward more frequent trading, which financially benefits the platform. "This is particularly worrisome if gamified platforms cater to young, inexperienced traders who are particularly susceptible to be influenced by 'fun trading,'" said Khapko. She advocated for "neutral" investment platforms that do not sway investor decisions and are ideal for self-directed investors.
Regulatory response to current scenario
Regulators have been increasingly scrutinizing gamified trading platforms due to concerns they may negatively influence user decisions and lead to financial disasters. In response, the US Securities and Exchange Commission (SEC) introduced new rules in July 2023, aimed at eliminating potential conflicts of interest in the algorithms used by these platforms. However, Khapko warned that regulators must strike a balance between preserving ethical integrity in online trading and not stifling technological innovation.
Improving financial literacy: A potential solution
Khapko suggested that enhancing financial literacy could reduce investors' susceptibility to behavioral nudges. She believes that a better understanding of finance can help protect investors, particularly the inexperienced ones, from being influenced by the gamified aspects of trading platforms. "I believe the most effective recommendation is to improve financial literacy across the board, which would reduce investors' susceptibility to behavioral nudges," she said. This recommendation comes in light of her study's findings, which were published in Management Science.
