Industry Future
16 November 2022 Article

Fun and Games: Investment Gamification and Implications for Capital Markets

  1. Sivananth Ramachandran, CFA, CIPM

Gamification and other behavioral techniques have many positive uses, such as education, but these methods could also be exploited to promote excessive trading. This paper analyzes the main issues and recommends reforms to prevent abuses.

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Gamification, and the broader use of behavioural techniques, is used increasingly in a variety of settings, including education, healthcare, and financial services. When used well, gamification can be a powerful tool for engagement, literacy, and driving positive outcomes.

However, these same techniques can also be leveraged 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.

We examine the latest crop of financial services apps and provide recommendations for regulators and the industry. Members may access an In Practice companion feature delivering digestible practical applications of the timely research.

The set of digital engagement practices, commonly called gamification and adopted by market intermediaries, is varied. These include features that attract attention, such as the user experience design features that include the creative use of colour, animation, and sounds; features that reduce frictions, including zero-commission trading; and features that emphasise the social aspect of trading, such as leader boards.

The last one, the social aspect, has always been part of stock market investing. But social media amplifies it by allowing opinions to percolate, diffusing information faster and across a larger set of investors, and because it’s mediated by influencers.

In our latest biennial Investor Trust Study, we surveyed more than 3,500 retail investors and found that a full 92% of investors aged 25–34 trust digital nudges, compared to 33% of investors over 65 years. Three-quarters of those aged 25–34 also reported that the use of apps increased their frequency of trading. These findings have implications for capital markets and long-term investor outcomes.

To enable users to benefit from gamification’s positive features, and to manage its risks, we propose (among other recommendations) that app design should include features that allow for review and reflection by users. For instance, requiring third-party authenticator apps for validating transactions in penny stocks and moving away from one-click transactions towards an order-review-confirm process are possible ways to introduce a little friction without taking away investor choice to invest.

We also urge regulators to consider warning labels for brokerage communications, including advertisements. Specifically, we propose that brokerage advertisements include a message that ‘excessive trading may be injurious to financial health’ and prominently mention any payment for order flow or other hidden revenue arrangements.

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