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Digital mobile-friendly platforms can make it easier to invest. But those same platforms may influence retail investor decision-making. The OSC’s Investor Office study, Digital Engagement Practices in Retail Investing: Gamification & Other Behavioural Techniques, discovered key insights into gamification and investor behaviour. It found these techniques can have a potentially positive and negative impact on retail investor behaviour.
Many platforms allow you to buy and sell stocks using a mobile device held in the palm of your hand. The digitalization of financial services has given retail investors in Canada, and around the world, many options for participating in the markets.
The way digital engagement practices are used on these platforms is of growing interest. For example, would seeing a list of top traded stocks influence your investment decisions?
The Digital Engagement Practices in Retail Investing study examined and tested gamification, and other behavioural techniques, and their likely impact on retail investor behaviour – both positively and negatively.
A randomized controlled trial with 2,430 people was conducted. Experiment participants were given $10,000 in play money to buy and sell stocks in a simulated, digital trading environment.
The study assessed the impact of two tactics — based on gamification and other behavioural techniques — on investing behaviour:
- Giving investors points for buying or selling stocks.
- Showing investors a list of top traded stocks.
The power of points: People who were rewarded with points for buying and selling stocks made 39% more trades than the control group — even though the points did not have any meaningful economic value.
This key investor behaviour is important as trading more frequently has a negative impact on investor returns on average. The concern is amplified with the rapid volume of trades that digital trading platforms allow.
Following the crowd: Participants who saw a list of top trades were 14% more likely than the control group to buy and sell those top listed stocks.
This behaviour is important as showing a top traded stock list can nudge investors to buy and sell stocks on that list. Seeing the top trade stock lists can lead to people following the crowd which is an example of herding behaviour.
Gamification and other behavioural techniques
The research report looked at gamification, and other behavioural techniques, used by online brokerages now or that could be used in the future. It also looked at the positive and negative impact these techniques have on retail investor behaviour.
The gambler: Techniques derived from gambling can be found on several online trading platforms. Gamblification uses rewards to drive certain behaviours. It could disproportionately focus investor’s attention on rewards and overweight small probabilities, leading to poor decision making.
Risky business: The study discusses how rewards offered through online trading may increase an investor’s comfort with risk taking on the platform. This is especially apparent when the reward is large. This might motivate more trading activity than users might otherwise do.
Rising up in ranking: Some online platforms have leaderboards with information about user performance. The study found seeing this information can spur social comparison and competition.
Timely reminders and feedback: Some techniques such as streaks, goal distance, and goal reminders could help you meet your investment targets. Reminders may help motivate you to achieve your long-term investment goals. Timely feedback can also help you effectively evaluate your portfolio and perhaps assist you with the level of diversification in your investments. Several online platforms use timely and appropriate feedback to help investors.
Digital Engagement Practices in Retail Investing: Gamification & Other Behavioural Techniques provides a better understanding of these techniques. It also provides a categorization of digital engagement practices in Canada and the US.
Increased awareness of the impact of these practices may have on your investment decision making is important. It may help you avoid situations where subtle influences on your behaviour may lead you to unwise investment decisions. Also, it may help you seek out digital engagement practices that support positive investor outcomes.