Examining gamification's power and influence in the markets

Gamification and social media have not only influenced how investors invest, but they've also changed why investors invest. Today, traditional motivations for investing such as establishing financial security or supporting companies of interest seem to have de-escalated in favor of fleeting gratification. We’ve entered a new world of investing that's flooded by behavioral nudges and incentivized by flashy reward systems.

In fact, new research from our Investor Trust Study found 20% of retail investors indicated their primary reason for using retail trading accounts was entertainment or speculation. So, it’s safe to say times have changed.

As investors’ motivations fluctuate and technology continues to proliferate across investing, it's important to understand how gamification and the rise of social media influencers present a double-edged sword to the industry.

On one hand, gamification has made investing more accessible and in turn, has the potential to drive the democratization of investing and financial literacy. Gamification has made investing easier to understand through streamlined user experiences. The presentation of educational resources and tools within investment platforms no doubt can help investors take charge of their financial futures, as long as the information is reputable and presented in a clear way.  

For example, users can model strategies through simulation tools before they execute to better understand long-term risk. Newer trading platforms, along with gamification, have also made it easier to open new financial accounts, which taken together attract a larger, and potentially younger audience who can and should take investment risks.

Conversely, gamification and the increase of social media’s influence on the investment space can also pose major risks to end users through the inclination to drive excessive trading and overall transparency issues.

Many of the reward systems in gamification practices, whether it's confetti and cash bells after placing a trade or leaderboards based on last month’s performance, are focused on short-term outcomes. Large volumes of trades are oftentimes how platforms generate revenue, so incentivizing frequent, short-term investments can benefit corporate bottom lines, but also normalize risky behavior among novice investors.

Digital nudges, like push-notifications, can also influence risky trading behaviors. Investors rely on digital nudges for updates on their investment apps and financial health. Amongst digital natives, 92% of investors aged 25 to 34 trust digital nudges, according to our research, so it's important that these nudges are carefully timed to support investors’ decisions instead of encouraging them to make riskier decisions.

With the rise of social media, retail investors now often turn to influencer personalities, noncredentialed accounts and other social media resources to inform their investment decisions. What they might not be aware of is that the apps or platforms they use to trade online might be leveraging paid social media tactics in their marketing efforts, presenting a clear conflict of interest. To uphold investor protection, financial institutions should clearly disclose remuneration to influencers and paid advertisements. Further, trading apps and platforms should have readily accessible, reputable resources, so investors aren't nudged toward third parties or AI-driven news feeds.

In addition to providing educational materials, gamified investing has an opportunity to empower people to make well-informed financial decisions, that is, if transparency between financial institutions and investors is given priority. While it's positive that online trading has lowered barriers for entry, the digital environment can bury important disclosures. Market intermediaries should consider implementing point-of-transaction risk disclosures to ensure that investors are presented with the right information when they are most likely to pay attention. By leveraging immediate notifications that warn investors who are trading in penny stocks or frothy meme stocks, digital nudges present a well-timed opportunity to help investors reflect and act prudently.

As participants in the capital markets continue to innovate, the emergence of new technologies and practices such as gamification shows no sign of slowing. Regulators should develop an adequate set of approaches to ultimately mitigate risks and bolster the benefits of gamification as advisors and investment professionals continue to navigate this new world of investing. As discussed above, CFA Institute’s recommended approach to gamification is centered around principles, conduct and disclosures. These considerations present the opportunity to provide more clarity into the risks of gamification so that investors can benefit from its positives and remain vigilant of its potential implications.

Sivananth Ramachandran is director of capital markets policy for India at CFA Institute.