The idea of “democratizing finance” has become a powerful justification for modernizing investment platforms. It sounds inclusive and progressive.
But with the constant push to leverage psychology to get people to engage with markets, it can also be responsible for investor harm.
A recent paper suggests this dynamic may run deeper than previously understood. The research examined the trend of “gamification,” or adding game-like features to mobile trading apps as a way of increasing client engagement.
The author, Eduard Yelagin, an assistant professor of finance at the University of Mississippi, looked at 142 gamification updates rolled out across 17 investment brokerages in the United States between 2018 and 2021. The research found clear winners and losers. The winners? The brokerages. The losers? Retail traders were the only group that were “consistently worse off.”
Retail investors earned lower returns while also experiencing greater volatility. That’s a double whammy. That’s like giving everyone new cars that are slower and yet still end up leading to more accidents. At the same time, these wilder trading patterns became easier for market makers to manage and profit from. Increased trading volume also improved brokerage profits.
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I’ve long been skeptical of the way the idea of democratizing finance is portrayed as only positive. Lowering barriers and increasing choice is not always the same as improving outcomes.
It is not just trading frequency that is affected. Experimental research published last year in the Journal of Behavioral and Experimental Finance found platform design features can meaningfully shift investor risk tolerance, too. Exposing study participants to motivational prompts inspired by actual social-media trading posts made them more willing to hold riskier assets for longer periods of time. That might not be a concern to investors when times are good, but it can lead to outsized pain when markets turn ugly.
In an earlier column, I looked at how the innovation of fractional share trading increased financial inclusion (a good thing) while simultaneously facilitating meme-stock trend-chasing behaviour for novice investors (a bad thing). An army of Reddit forum users (remember WallStreetBets?) was able to drive up the value of higher-priced shares of companies such as GameStop and AMC partly because of the surge in small-volume trading afforded by fractional share and zero-commission trading. Investors piled in and were left holding the bag when prices ultimately crashed.
I’m not arguing against innovation. Digital platforms have reduced costs and increased financial inclusion, allowing many more investors to participate in capital markets. That is real progress. But the challenge is that engagement-driven design can also blur the line between investing and speculating.
Investing is starting to look (and feel) like a game – but is that a bad thing?
For example, 24-hour trading of stocks is now available in Canada. If I’m buying and holding for the long term, I’m not too bothered about having to wait until normal trading hours to place a trade. But will a day trader make better decisions at 2 a.m., or worse ones?
There is enough evidence to argue that the democratization of investing can sometimes benefit the industry at the expense of many retail investors. So far, in this long bull market, investors don’t seem to have minded. A rising tide lifts all boats, as they say.
Part of the problem is that Gen Z and many millennials have not truly felt the pain of a severe market downturn with significant skin in the game. But those who have been encouraged to view investing as frictionless, social and constantly stimulating may discover that a prolonged bear market is exactly none of those things. Beyond financial losses, it portends an erosion of trust.
Platforms that want to lead the next phase of growth should consider competing not just on price or novelty, but on whether their investors actually make better decisions over time.
Preet Banerjee is the creator of YourMoneyDegree.com, a financial literacy program with an AI companion app.