If you show investors exploding confetti animations every time they place a trade, it encourages some to trade more, but others to look down their noses at this gamification strategy.
But if you show those more critical investors that same confetti animation when they’ve increased their portfolio’s diversification, they might look at gamification differently.
A report just released by the Ontario Securities Commission takes a new look at the risks that gamification strategies pose to investors and one of its conclusions is that not all gamification is negative. There can be opportunities to improve investor outcomes through the very techniques which have predominantly been vilified in earlier research.
A previous OSC report from 2022 found that participants in a trading simulation who were awarded points - which had no value - for placing trades executed almost 40 per cent more trades than participants in the same simulation who did not receive any gamification exposure.
One of the most famous papers in the field of investing behaviour, aptly titled “Trading is hazardous to your wealth,” found a strong inverse relationship between trading frequency and investor returns.
In other words, the more you trade, the lower your returns tend to be. This is the rationale behind a common investing adage: “Treat your portfolio like a bar of soap. The more you touch it, the smaller it gets.”
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The prevailing wisdom is that gamification is bad for investors. But it turns out that this conclusion is too black-and-white.
Another paper, this one published last year in the journal Management Science, also showed cracks in this hypothesis. The authors found that investors with lower financial literacy are more likely to be attracted to gamified trading platforms in the first place. Further, pleasure derived from gamification techniques may increase investor engagement.
And perhaps most striking: they did not find evidence that pleasure-producing gamification lead to greater trading mistakes. They suggested that gamification could have both positive and negative impacts on investor outcomes.
And this is exactly where the OSC’s new report furthers the conversation in an evidence-based way. Instead of assuming all gamification is bad, they look at what behaviours can be encouraged.
To test this idea, they ran a large experiment with more than 4,000 Canadians in a simulated trading environment. Participants were exposed to four gamification techniques that rewarded portfolio diversification: A diversification score, a diversification goal, a leaderboard for diversification, and digital badges for levels of diversification.
All four techniques yielded an improvement in portfolio diversification. Taken together, it’s clear that how we think about gamification needs to be more nuanced.
Many profit-seeking trading platforms will use gamification to reward behaviours that make more money for the platform. But perhaps some platforms will lean into gamification that rewards Canadians who are not looking to become speculative day traders, but rather successful long-term investors who would appreciate gamifying responsible portfolio construction.
Regulators will find much food for thought from the new research. Instead of instituting blanket policies that curtail all gamification, they can contemplate a more surgical approach which can mitigate the effectiveness of the most harmful uses of gamification at the expense of investors and foster the use of techniques that could benefit investors.
One thing is for sure. Gamification is inevitable. The question is how we can address it for the betterment of investor outcomes.
Preet Banerjee is the creator of YourMoneyDegree.com, a financial literacy program with an AI companion app.