Markets have long been compared to gambling or a game. Many see speculators “betting” on a stock’s price “action” to increase their “winnings”. However, investing is not the same as speculation, gambling or gaming. It entails an evaluation of the risks of qualified real-world inputs rather than a roll of the dice or a gamer “cheesing” their way to victory. In recent years, we have seen an acceleration of “gamification in investing.” This is a slippery slope for new investors who have not taken the proper measures to learn to invest the right way. So, how did we get here and what are the pros and cons of gamification in investing.
Previously, there was a minimal amount of gamification of the stock market in practice due to its historical structure. The need for individual investors to utilize regulated brokers or investment managers to access the market limited the investors’ information and independence.
However, the current democratization of information and Uberization of the stock market (exemplified by so-called Meme stocks like AMC and GME) has led to an increased gamification of the market, especially by the Tik-Tok centric Gen Z and Millennial generations.
The democratization of information increases the access of information to the masses through technology. Now instant and constant information flows are available to anyone with a computer or smartphone, providing all investors – institutional and individual alike – with an equal playing field.
The Uberization of the market is the utilization of a technology platform to eliminate the traditional middleman/broker, expanding consumer reach and lowering costs. Uber (obviously) accomplished this for local transportation, Airbnb and VRBO transformed hospitality, and Robinhood has done the same for stock trading.
Founded in 2013, Robinhood officially launched its app in March of 2015, with easy (smartphone) access to the stock market and zero-commission trading. In 2019, Schwab, E-Trade, Ameritrade and Fidelity all followed and offered zero- commission trading. As of mid-2021, Robinhood has over 30 million users, predominantly Millennials with an average age around 26. The company has certainly transformed how stocks are traded (through a phone with no commissions) and who has access (everyone)!
Yet, recently trading activity has flattened, and the company forecasts a decline in new account openings as it appears the targeted Millennial demographic is well-saturated. Recognizing this, Robinhood announced in mid-September that they were kicking off a nationwide marketing campaign directed at college students. This focus on Gen Z is smart for Robinhood to capture the next generation; however, there are concerning consequences of this initiative
Unlike the transportation and hospitality sectors, activity in the stock market involves risk, producing winners and losers. When gamified, investing can become more of a market “experience” chasing the next “To the Moon!” stock instead of employing a stable, methodical (boring) use of compound interest and steady market returns that help create wealth. And the ability to gamify the market is enhanced by the escalation of the democratization of information and its Uberization.
New open information platforms not only provide the data necessary to evaluate investment decisions, they also offer a multitude of opinions and advice, frequently riddled with emotion or inaccuracies. The Uberization of the market provides accelerated access to the market and eliminates the costly middleman.
However, for investors it also diminishes the time in which to obtain financial education, the breadth of experience and knowledge furnished by brokers, and an understanding of the risks associated inherent to investments. Instead of investing, many use Robinhood to speculate on short-term price swings, overlooking company fundamentals or market risk.
It is universally agreed that besides Robinhood’s ease and accessibility it has gamified the market by utilizing psychological motivators similar to popular video games to drive behavior.
The use of emojis, push notifications, affirmation emails, colors and gaming imagery all help create a video game-like environment. Some say Robinhood creates players rather than investors. However, there are a number of positives related to this gamification.
Specifically to Robinhood, it has made investing affordable for any age and income. And while the research into the effects of video games upon the human psyche is fledgling, there are numerous studies demonstrating some overall positives of video gaming:
Several pundits have also postulated that gamification is good for the market because it engages the otherwise difficult-to-attract younger Millennial and Gen Z demographic. They argue that if the market did not have a video game-type appeal the individual investor base that supports the market would die out. Gamification gets an otherwise distracted and uninterested age group started in the markets, where they can learn in real-time with real money what is investing.
Other academic studies, however, point to the negatives related to a video game approach to the stock market:
A recent University of California study “Attention-induced Trading and Returns: Evidence from Robinhood Users” found that Robinhood investors engage in more attention-induced trading than other retail investors. Furthermore, Robinhood attracts “relatively inexperienced investors … partially driven by the app’s unique features.” Additionally, the study discovered that intense, attention-induced trading by Robinhood users produced negative returns overall.
Millennials and Gen Z’ers rely heavily on the opinions of crowds to make investment decisions, following apps like r/wallstreetbets, WeBull, and Tik-Tok influencers like @assetentities or Graham Stephan. And this combination of a game-like backdrop with demographics prone to groupthink creates a potentially speculative and high-risk mindset.
Robinhood has transformed stock trading. It has opened the market to everyone in all socioeconomic levels. That is a very good thing! It is a great tool for all generations. But like all tools, Robinhood should be utilized with an awareness of its purpose and capabilities, as well as the dangers of its game-like environment. And the younger generations especially need to increase their financial education.
Like all generations involved in the stock market, they need to understand that investing is not a game nor only speculation, but a disciplined process designed to realistically meet their financial goals and build lasting wealth.