What are the implications when online trading platforms start mirroring games with incentives like badges and colourful confetti to keep investors engaged for extended periods?

For seasoned investors, such features make little difference. A study by the University of Toronto involved nearly 1,000 participants in simulated investment scenarios, which suggests that additional informational elements like price change alerts might even enhance the execution of a seasoned investor’s strategies.

The study found that gamified elements did not significantly increase trading mistakes or volume; trading volumes rose by a modest 5%, with less than a third of this increase directly attributed to gamification.

However, the scenario shifts for novice investors who need more extensive market knowledge. The research used two experimental platforms: a basic one and another equipped with a blend of informational and reward-based features on popular gamified sites like Robinhood and EToro. Novice investors showed a clear preference for the rewards-based platform, leading to a 12.5% increase in trading activity compared to the more basic platform.

Moreover, the gamified environment reinforced counterproductive investment strategies, such as holding onto losing stocks and selling winners. Investors prone to such a strategy were found to be 32% more likely to sell after a price increase alert and 38% more likely to hold after a price drop compared to their actions without such notifications. In contrast, more knowledgeable investors could do the opposite, being 36% more inclined to purchase after a price increase.

Mariana Khapko, an assistant professor of finance at the University of Toronto Scarborough, who is also cross-appointed to the University’s Rotman School of Management, advocates for “neutral” investment platforms. These platforms are ideal for self-directed investors as they do not bias investment decisions. She notes that while the common advice for amateurs is to invest in indexed funds and largely ignore market fluctuations, gamified platforms tend to encourage more frequent trading, benefiting the platforms financially.

This trend is particularly concerning as it targets young, inexperienced traders who are especially vulnerable to engaging in what is perceived as ‘fun trading,’ according to Prof. Khapko. This concern is shared by regulators, who have heightened their scrutiny of gamified trading platforms in recent years, worried about their potential to mislead users into making poor financial decisions. In response, the U.S. Securities and Exchange Commission issued new regulations in July 2023 to eliminate potential biases in the algorithms that power these platforms.

While regulation is necessary to maintain ethical standards, Prof. Khapko stresses the importance of not stifling technological innovation in the trading sector. She believes enhancing financial literacy could diminish investors’ susceptibility to such behavioural nudges, offering a more effective solution to the challenges posed by gamified trading platforms.

More information: Philipp Chapkovski et al, Trading Gamification and Investor Behavior, Management Science. DOI: 10.1287/mnsc.2022.02650

Journal information: Management Science Provided by University of Toronto, Rotman School of Management