By Sivananth Ramachandran
The term “gamification” – the application of game-playing design elements and principles to products or services – is being increasingly used in the setting of financial services. Alongside the use of behavioural techniques and the rising influence of social media, investment gamification can be a powerful tool for increased investor engagement and literacy, driving positive outcomes. On the flip side, however, gamification can potentially be used by firms to drive excessive trading, induce trading in complex or high-risk products, or encourage other harmful behaviours, all at the expense of clients’ best interests.
What is investment gamification?
Gamification in the context of investment includes adoption of game features and broader behavioural nudges. Game features used by market intermediaries come in various forms of digital engagement practices, such as points, badges and leader boards, as well as more sophisticated reward systems. Some examples of behavioural nudges are attractive app designs, pleasant presentation of information and push notifications, news stories based on trading activity, and encouraging investors to copy popular traders.
These features and nudges are backed by business model innovations that increase convenience or reduce frictions, such as zero-commission trading, fractionalisation of shares, increased ease of account opening and fund transfers. From a marketing point of view, advertisements that amplify one’s social status, the use of social influencers and bonuses upon account opening and referral also catalyze the process of gamification.
Against the backdrop of the COVID-19 pandemic, both gamification and social media serve as important drivers of the rise in self-directed trading (SDT). Investment has always been a social activity and tied with social opinion; as famous economist John Maynard Keynes once said, stock investing is just like a beauty contest where “we devote our intelligences to anticipating what average opinion expects the average opinion to be”. In other words, the prevalence of social media has helped investors figure out what the average opinion is, or what it seems to be.
Risks behind the fancy features
Gamification and the rise of social validation–driven investing have generated ethical concerns, with critics claiming that the addictive qualities of these practices may incentivise individuals to take actions that are against their interests. The general motivations for investors to invest include building financial security, supporting the nurturing of families and expressing values through product choices, but gamification may drive investors away from those interests and instead, weight investment decisions toward emotional preferences. According to CFA Institute’s fifth biennial Investor Trust Study, nearly 20% of retail investors reported entertainment or speculation as the primary reason for using their retail trading accounts.
Another concern stems from the transparency of social media activity. There could be clear conflicts of interest when influencers are compensated by a firm or product provider without proper disclosure to users of such arrangements. On top of that, there are risks associated with fake accounts and social media messages driven by bots. It could be troubling to see influencers make questionable product recommendations, not to mention that they may overstate their number of followers for more credibility.
In addition to ethical and investor protection concerns, gamification seems to have increased trading in riskier, popular stocks and strategies, bringing risks to market infrastructure. A prominent example in 2021 was the suspension of activity on Robinhood, a US brokerage, due to margin pressures and system stress caused by the massive trading on meme stocks (stocks that gain popularity quickly through social media). In the long term, events like this may impact investors’ risk appetite and attitude towards the stock market – those luckier may mistake their luck for skill and increase their risk taking, but those who lost money may decrease their risk taking or even investment.
Recommended approach: principles, conduct and disclosures
In view of the impacts and risks associated with gamification and social media, regulators ought to develop the appropriate set of approaches to maximize the benefits and minimize the risks. CFA Institute’s recommended approach is three-pronged – comprising principles, conduct and disclosures.
First, the reward systems in the gamification practices of firms should focus on long term outcomes instead of short terms ones. Instant gratification and monetary performance rewards based on recent performance or transaction volumes should be avoided, while measurement and reporting on long-term performance along with risk is crucial so that the reward systems are calibrated accordingly.
Moreover, trading apps and platforms should provide credible research on assets from reputable third-party sources. Some platforms share information and news from social media, and while they may or may not be inaccurate, users should be nudged toward information of stocks and other asset classes from trustworthy sources and research firms.
Apart from providing research materials, there is more to be done to allow users to make better informed decisions. Market intermediaries are encouraged to provide point-of-transaction risk disclosures in plain English as users are most attentive at that time, increasing the likelihood of them paying attention. The way information is presented matters too – lengthy information on screens tends to discourage users from reading and instead results in users skimming through the information, which suggests the necessity of having a design specifically for disclosures that is optimized for mobile devices.
In terms of transparency, financial institutions should be fully transparent to users about the remuneration they provide to influencers for their social media advertisements, helping investors distinguish clear product advertisements from personal views. Regulators could also consider establishing licensing requirements for social influencers to help investors better distinguish between general advice and personal advice from social influencers.
Market intermediaries should also be transparent about self-directed trading (SDT) risks. For instance, investor education materials and public communications must not mislead or downplay the risks and complexity inherent in investing. Warnings and alerts could also be used to remind users of the risk profile of the assets they are trading before taking actions. Warnings could also include general messages stressing that excessive trading may lead to financial loss.
To conclude, the continuous innovation in capital markets, from e-commerce strategies to social media strategies, has contributed to the emergence of gamification. While this innovation, just like any other, has brought some unintended negative consequences, such as excessive trading and risk taking, the market will also continue to innovate, followed by regulators. The principles discussed above, together with improved conduct and disclosures on the part of intermediaries, will provide the best approach to manage the risks associated with gamification and enable users to benefit from its positive features.
(The author is Director of Capital Markets Policy, India, CFA Institute. Views expressed above are personal)