Are today’s traders making informed judgements based on data and analysis or are they responding to influencers, leaderboards, behavioral psychology cues like nudges, and instant rewards in order to level up? Does it matter?
Hooked and Hustled: The Predatory Allure of Gamblified Finance is a new academic paper authored by Nizan Geslevich Packin, Doron Kliger, Amnon Reichman, and Sharon Rabinovitz. They define gamblification as “the fusion of gamification and gambling features in financial markets.”
Gamification isn’t in and of itself a bad thing. It can be used to encourage people to make better financial choices, to stick with a plan of steady investing, or improve spending habits. But in recent years, investment apps have integrated features that resemble video game reward systems to encourage trading. The reward for trading is instant, regardless of the long-term benefits of the trade.
Investing has always been for some a form of entertainment. Walk into a Scudder or Fidelity investor center in the 1980s and you’d see retirees who’d come in to watch the ticker, drink coffee, and discuss trades with their friends.
When is it investing and when is it gambling? Unfortunately, many people think investing and gambling are the same thing. And, a study by the CFA Institute, FINRA Investor Education Foundation, and Zeldis Research found a correlation between gambling and investing among members of Gen Z. Perhaps the two activities provide similar thrills.
Adding to the confusion, some firms, including Robinhood, now integrate “prediction markets1” in order to offer punters the ability to wager on things like college basketball, or the extent of the suffering wildfires, floods, and other climate-related catastrophes will cause.
When does engineering brilliant online or mobile trading experiences cross the line and become the creation of predatory practices? Perhaps it’s when addictive digital engagement features lead traders to pursue rewards with indifference to the return on their investments, or when they reward vulnerable investors for engaging in excessive trading, impulsive decision-making, and risk taking that is not merited by the potential (financial) rewards.
Nizan Geslevich Packin, is a busy person. She is currently a Professor of Law at Baruch College (part of the City University of New York system), a Professor of Law at the University of Haifa, a Venture Partner with NextGen Venture Partners, co-founder of The Multidisciplinary Center on Childhood, Public Policy, and Sustainable Society, a Research Member at the European Corporate Governance Institute, and a self-described finance and tech nerd.
Q. Nizan, how did you and your co-authors become interested in this topic?
A. We have an interdisciplinary team which includes someone from economics, another scholar from criminology and addiction studies, myself – I do a lot of law and economics, consumer finance and investor protection – and someone else who does cyber law and technology.
We saw all these different affairs in the news over the last couple of years and started talking about how all of our interests align when we talk about retail trading forums that are essentially adopting the very dopamine triggering loops that are documented in the gambling and the addiction research. The 2021 GameStop saga highlighted how the digital engagement practices really push inexperienced users toward this extreme risk taking. We looked at the various practices – the confetti got a lot of press right away, as you probably remember. The leader boards and influencer hype. It kind of set us up to document those design practices and you can measure their effects in the investing and trading ecosystem.
Our hope was to propose safeguards or at least to raise awareness to better preserve access while minimizing some of the harms that we’ve been noticing and writing about.
Q. When does gamification become gamblification?
A. That’s probably the most important aspect of this, right? Because gamification is something that we see everywhere. Kids play games; adults are motivated by games. It becomes gamblification when the chance-based rewards, the variable ratio payouts, and the sensory reinforcements are layered onto the investment interfaces. It’s almost like a digital design choice. You layer those onto the interface to prioritize the excitement and the thrill over the informed decision making. Historically, we’ve wanted the financial markets to be an area where you make informed decisions, and we see that once you change that mindset that’s where gamification becomes gamblification. At that inflexion point, the users really start chasing the thrill, the excitement, more than the underlying fundamentals, the historic investment foundations that the Buffets of the world have been talking about.
To us, that almost mirrors the slot machine psychology if you look into that excitement, that thrill element.
Q. Does any of this happen without mobile trading apps? Without commission-free trading?
A. Obviously, the gaming apps are a big change because the friction that’s been removed and the fact that they’re 24/7 available and smartphones are 24/7 accessible. This creates the perfect storm for gamblification because if before you had to go to your desktop and power-up these platforms, now it’s basically always with you, even when you’re on the go. You’re always one swipe away from trading, so the entire environment has changed. This supercharged the frequency and you can do it on impulse. Even in the context of social media, we’ve seen some of these studies show how the constant nudging and the knowledge that this is literally in your pocket to be accessed whenever you want is a game changer.
Q. You can, of course, use gamification techniques for good: to get people to invest earlier or better, or to save more, or even to feel like they belong when they may not feel like they fit the profile of “savvy investor”.
A. You’re exactly right that gamification does have a lot of advantages and we do use it in a lot of positive contexts. For example, behavioral techniques are used in different roles in life and in different types of ecosystems. Streaks, and goal setting, and progress bars can really motivate people and create positive outcomes, whether its eating healthier or reaching 10,000 steps a day (not just when you’re a tourist on vacation somewhere exotic but also in your daily routine). Even learning better. We see apps motivating people to complete a few exercises every day to reinforce a new language learning process that might otherwise be more challenging. So we do see definitely that these gamification techniques do have a lot of proven advantages.
But we can notice, particularly in finance, that what’s crucial is pairing these techniques with clear disclosures and a cooling off period, and nudges that promote education rather than towards thrill and action, is what is crucial in the fintech context.
Q. So gamblification isn’t by itself a predatory practice. Platforms need to take other actions before it becomes problematic. Is that fair to say?
A. That’s fair to say. Gamblification on its own is a design strategy. That’s what we really need to understand. It truly becomes problematic only when the platforms employ it without guardrails. Everything that you provide guardrails to could be done in a responsible way. But when you mask vulnerabilities or you glamourize leverage or you celebrate each trade then it becomes riskier and those design choices are truly a problem. Responsible versions could, of course, downsize the risk and provide opt-outs.
This is something we see from the casino landscape. When you go to Las Vegas and you see all these people at the slot machines and they can’t exit. Let’s say they said I’ve lost enough and I want my money out. It’s almost impossible to find that button. It’s small and it’s not well lit. So we see some of these design choices done here, too. What it really comes down to is the design strategy in many ways.
Q. Is there evidence that these new brokerage apps are targeting less sophisticated investors and other vulnerable users with gamblification techniques? Any evidence that less sophisticated investors are more vulnerable to them?
A. On its face, we didn’t see any evidence that shows these more vulnerable populations were targeted but they are definitely the ones who were impacted the most. There was some empirical work done last summer by the UK Financial Conduct Authority. They had a large pool of survey-takers that they used and followed in their empirical work. It really showed that these push notifications and the prize draws increased the risks greatly, with significance that was very noticeable, on three specific populations:
- people with lower financial literacy,
- emerging adults (we used to think of adulthood as something that starts at the age of 18 and now we know that the body and mind keep developing and growing, so we refer to this group of 18 to 24 year olds as emerging adults),
- and women.
Q. On the flip side, is there evidence that these platforms are promoting financial inclusion by making it easier to get yourself onto the on ramp?
A. That’s one of the classic arguments for fintech services, that they do increase inclusion because of the very fact that you have it on your phone wherever you go 24/7. And, of course, the lower fees and the user friendly, easy-to-access interfaces broaden participation.
But the question is if genuine inclusion requires just more people having access or if it requires pathways to actual diversification and long-term wealth? Those are goals are just as important if not more important than more people having around-the-clock trading access wherever they are. And of course, if engagement tools, as I mentioned before, lead less experienced people toward more complex trades, the benefits of greater inclusion may evaporate to some extent.
Q. What roles do third-party data aggregators play in trading apps?
A. With some of these apps we see third-party aggregators suppling real time account and transaction data that fuels some of the personalized nudges, but they can also raise privacy issues, and in particular contextual integrity issues. That’s a theory that was developed by a professor named Helen Nissenbaum, which means that when you start using a service or a product you have certain contextual expectations. But, of course, the context can change. Let’s say you started using Facebook, and a few years later someone can come along creating an alternative credit score based on your posts or your friends’ posts. That’s not the context you had in mind when you first opened an account, right? So, there are certain privacy issues related to contextual integrity that we see in connection with this — data governance and rules that are not always relevant or even existing in many jurisdictions and are very much needed because of the potential.
Q. Are trading apps exploiting a need for community?
A. In many ways, people want to belong. We’re social learners, we want to check with other and talk to people. We all suffer from FOMO (fear of missing out) and of course all these badges and the communal “you only live once” narratives really satisfy this need to belong, to be part of something, and to have others see you. So, of course, sometimes that comes at the expense of prudence.
Q. In this context, the context of gamblification, how should we think about crypto, particularly these inherently useless meme coins?
A. That’s a very valid point. And speaking of community and needing to belong, of course the highly speculative meme coins illustrate the blur between entertainment and investment because their value rests only on the collective sentiment of the community that is interested in them rather than on actual utility, amplifying the volatility of these types of products. If your community is interested in them, then there’s value, but there is no outside or external value per se. The value does really rest only on this collective sentiment. In many ways it ties back to your previous question about community.
Q. Brokerage firms have long promoted options trading to retail customers even though they know most will lose money. How is this any different?
A. Trading options long predates these apps and platforms we talk about and see today, but what may be different is that today’s interfaces and these platforms really gamify the actual process which is something that was less of a thing in the past. All the celebrations, the confetti (which was quickly eliminated due to the attention it received) the instant buying power, the social proof — all these are part of a process that makes the strategy feel more like a game rather than a hedging tool. I think that’s where you see the difference.
Q. Who’s responsible for regulating this in the U.S. on the federal level? Is it the Securities and Exchange Commission, the Federal Trade Commission, the Consumer Finance Protection Bureau, or the Commodities Futures Trading Commission? Is it all of the above? Does the patchwork of federal and state laws that regulate these platforms and these practices in the U.S. make it harder to protect consumers?
A. There are multiple federal actors and even some state actors that share jurisdictions for all of this. The SEC deals with securities. The CFTC with futures contracts and probably some crypto assets. The FTC deals with monopolies but wears another hat under which it deals with consumer protection and deceptive design. And of course you have the CFPB that deals with consumer finance, among others.
Q. We did have a CFPB. I don’t know anymore.
A. The coordination between all these agencies and the ones that are operating at the state level is crucial. You are right that the patchwork of federal and state laws is very challenging because as we saw in the prior financial crisis in 2008, the blanket is never the perfect size. It’s either too big or too small, and the overlapping federal and rules create gaps and forum shopping, and when there are multiple parties responsible no one is really responsible. In many ways, platforms or apps or those offering these sorts of services can locate the servers in more lenient jurisdictions. Regulatory hedging is something that exists in the financial world and in the fintech ecosystem as well. It complicates enforcement. It leaves financial consumers and investors uncertain about the remedies. We’ve seen that play out in the crypto space in the last few years.
Q. Should we instead be looking to gambling regulations to protect vulnerable consumers?
A. We do allude to that in our work, and gambling frameworks do offer useful concepts, for example, loss limits or cooling off periods – all sorts of reality checks. But, if you fully import this type of regulatory scheme it would stifle legitimate investments in the financial markets so there are a lot of problems with that. We wouldn’t want to do that and risk choking innovation as well as financial opportunities. We were kind of looking at a hybrid model that imports some of the concepts, like duty of care, and some evidence-based engagement caps, looking more into the design choices which is something that the SEC and other regulators haven’t really been doing so far but is clearly of importance here as well.
Q. Are these techniques regulated differently in the UE and UK?
A. The EU and the UK have moved a little bit faster than we have and some other jurisdictions around the world have also done experiments that led to more guidance on things like game-like features and design principals. Some are experimenting with sandboxes and all sorts of other approaches. Right now, in the U.S. it’s a little bit tricky. It’s hard to tell where we’d go. But definitely there are things we can learn from other jurisdictions and perhaps we could experiment ourselves.
Q. Robinhood has announced its intention to add bank accounts and wealth management services to its offering. Could anything go wrong?
A. What could possibly go wrong? In general, adding banking and advice widens the scope for conflict just because so many things that are now on the table such as cross-selling and data sharing and complexity induced mistakes — all sorts of other things. Doing this and adding these types of services underscores the need for fiduciary-style duties, maybe even ring-fenced operational limits or structural separations limits because of the potential to get these things wrong.
Q. Is it inherently a problem if financial services merge with gaming, sports, and entertainment? Do we need something like a Glass-Steagall Act to keep them separate or is it okay if they come together?
A. In many ways this ship has sailed. Convergence is already underway. We see on the one hand fintechs and fantasy sports style contests and streamers trading live and prediction markets and all these different things happening. On the other side we see banks and traditional financial institutions adopting more of the gamified design elements such as “bring your friends and get some benefits” or credits. Of course, policy makers must ask what ends the resulting ecosystem serve. Does it improve capital formation, etc., or does it primarily sell thrills? If it basically just sells thrills, that’s less desirable.
Q. Do trading apps that don’t charge users commissions and often don’t require any minimum investment amount need to turn to gamblification to fuel payment-for-order-flow revenues?
A. Gamblification just magnifies volume. We’ve seen these engagement practices used by other digital platforms. Some of the biggest social networks got into trouble because of that. User engagement is key for digital platforms. The more engagement the higher the revenue. That’s the main driver. Of course, transparent disclosure and optional settings to slow things down could help realign the incentives. But everyone wants more digital engagement.
Q. Have you seen evidence of social trading or copy trading capabilities being exploited for pump-and-dump schemes?
A. I haven’t seen anything concrete, but you are right that copy trading and leader boards could enable, easily, pump-and-dump dynamics. If there’s a finfluencer everyone follows, it’s so easy. We’ve seen cases – not necessary inside these trading platforms, but via posts on Twitter (X) or other social networks. I haven’t seen specific evidence of this but the potential is there so I would think that audit trails and more liability for misleading signals is critical.
Q. How would you propose we regulate “finfluencers”?
A. Finfluencers have definitely gotten more attention in the last several years and they should perhaps face disclosure rules that are parallel to those we have for investment advisors. Definitely one thing we need to do is make sure they have clear conflict-of-interest disclosure requirements and prohibitions on undisclosed compensation. Some of that stuff the SEC has already been doing in general with influencers, but finfluencers are even more worthy of our attention because of the risks. We could also think of some types of sandbox experiments with risk illustrations rather than promises and combining some of the public/private sector partnerships to test exactly what is most effective and efficient.
Q. What are your concerns regarding gamified finance (GameFi)?
A. GameFi is an acronym after DeFi (which stands for decentralized finance) and it is really meant to marry economics with play, with games. So if you tie video games to economics and imagine all the ways you can exploit rewards and schedules and underage participants in all sorts of cross-border schemes. Enforcement is especially challenging with these types of situations. First of all, the cross-border element already adds a lot of complexity but when tokens double as securities which is a possibility in GameFi if those digital tokens are on the one hand something you play with but could be, on the other hand, actual securities. That becomes much more complicated for enforcement agencies to deal with.
Q. There’s been talk of changing the accredited investor rules, which were designed to make sure people investing in high risk, less liquid pools and private securities have the sophistication to understand the risks involved and the resources to recover from any losses. Are you concerned by what might happen if we allow people to self-certify, for example?
A. Self certification would open the private market floodgates to all these unsophisticated investors who might be interested and think that no longer would paternalistic arguments keep them out. And that does intensify the very behavioral biases that gamified features exploit. In my opinion, a balanced approach that enables more participation but offers some risk-tiered limits is necessary.
Q. Why is there a relationship between lottery jackpot size and retail trading activity?
A. The larger pot fuels trading by feeding a speculative appetite. People are reminded also about traders who got life-changing wins. Think of that little convenience store with the big sign that says, “We sold the winning $10,000,000 lottery ticket here!”. It does nudge people toward a riskier bet because it feels more feasible, more realistic.
Q. Should we teach people why that’s not realistic in high school, so they understand how the odds work? And basic financial literacy?
A. Financial literacy is actually a pretty complex issue. It’s important and we should be doing what we can it improve it. As seen in the FCA study, the UK study that I mentioned earlier, people with lower financial literacy were more exposed and suffered more significant impact.
But it’s actually really hard – much harder than people think – to teach financial literacy in an effective way. Some studies have shown that sometime when you teach financial knowledge to specific individuals, they come away feeling that they’re experts and end up performing even worse.
So while we need to do much better at increasing financial literacy, we need to do it in a scientific, effective, and proven way based on what evidence has shown is effective. I agree with you that part of the illusion of potential wins is an issue that needs to be better understood. The spectrum between skill and luck is a significant concept to understand.
Q. What’s the solution? How do we address gamblification effectively?
A. Meaningful progress is really possible but the agencies need to work together because of the issue of jurisdiction which we noticed is a problem and they all need to prioritize the design issues and design standards here and the behavioral audits that need to be done.
The SEC started a few years ago looking into digital engagement practices. They even had a call for public comment. But nothing resulted.
I think it’s ambitious but it’s not impossible to understand how to do the design strategy in a safer way without choking innovation and while enabling more possibilities – exciting ones, too – but with certain guardrails.
Q. Is there any hope of enlightened regulation of gamblification in the U.S. before 2029?
A. It’s really hard to tell. Things are moving in so many directions at the same time. But I think if there’s enough public demand. We’re also in a unique position now. In the post Chevron world the courts have much more power over the interpretation of laws than they’ve had in the last 40 years. The agencies are no longer the ones that the courts refer to as the experts when interpreting the law. So, some of it is in the courts’ hands, as well. It could be a good thing or it could be a bad thing.
# # #
1 Prediction markets failed spectacularly at identifying the newest Pope.
