The Gamification of Investing: How It’s Leading to Risky Behavior and Reduced Long-Term Returns

The rise of commission-free brokerages and the gamification of investing have transformed the way people approach the stock market. Platforms like Robinhood and other online brokers have made it easier for everyday people to get involved in investing. While this has democratized investing and lowered barriers to entry, it’s also led to risky behavior, impulsive trading, and reduced long-term returns for many individual investors. In this article, we’ll dive into the impact of gamification on investing, the hidden costs of commission-free brokerages, and how predatory monetization tactics have found their way into the world of investing.

1. Predatory Monetization in Video Games: A Blueprint for the Market

The concept of gamification in investing shares a lot in common with the predatory monetization tactics used in video games:

• Dishonest Tactics to Extract Money: Just as game developers use tactics like microtransactions, in-game purchases, and loot boxes to extract money from players, some investment platforms use similar strategies to incentivize excessive trading. These platforms gamify investing, offering rewards, confetti animations, and leaderboards that mimic the excitement of video games.
• High Fees and Minimum Charges: While commission-free brokerages have removed trading fees, they often make money by routing order flow to other institutions or using payment for order flow. This can lead to hidden costs that aren’t immediately obvious to users, encouraging excessive trading to generate revenue, much like in-game purchases that keep players engaged and spending money.
• Encouraging Excessive Trading: Much like video game developers encourage players to keep spending to level up or unlock rewards, investing platforms encourage frequent trading. This can lead to higher volumes of trades, which in turn generate hidden fees and commissions for the platform, while the investor may end up with reduced returns due to impulsive, short-term trades.

2. Evolution of Commission-Free Brokerages: From Traditional Models to New Realities

The shift from traditional brokerage models to commission-free platforms like Robinhood has made investing more accessible. However, it’s also created new dynamics that investors should be aware of:

• Traditional Fixed Price Models: In the past, investors were charged a fixed fee per trade—often $5-$10 per trade—which meant that each transaction came with a direct cost. Although these fees could deter excessive trading, they also made it harder for everyday investors to engage in the stock market without thinking carefully about each trade.
• The Emergence of Commission-Free Brokerages: Platforms like Robinhood revolutionized the market by eliminating these fixed fees, making it seem like investing was now free and easy. While this sounds appealing, zero commissions often come with a cost elsewhere. For example, some commission-free platforms profit from routing order flow to institutional investors, creating a conflict of interest between the platform and its users.
• Automated Trading Settlements and Hidden Costs: The rise of automated trading and settlements has made it easier to execute trades, but it has also introduced hidden fees. The lack of transparency surrounding these costs means that many users may not fully understand the price they’re paying for their trades. In some cases, these platforms benefit from charging higher fees on trades or earning money from the spread between buying and selling prices.

3. The Impact of Gamification on Investing: Turning the Stock Market into a Game

One of the most significant consequences of the gamification of investing is the way it has changed how individuals approach the stock market:

• Investing as a Game: Platforms like Robinhood make investing feel like a game, complete with high scores, badges, and confetti animations. These features are designed to keep users engaged and motivated to continue trading, much like the rewarding elements of mobile games. However, while games are meant for entertainment, the stakes in the stock market are real, and this mindset can lead to risky financial decisions.
• Encouraging Risky Investments: The thrill of trading in a gamified environment can encourage investors to take unnecessary risks, as they’re more focused on immediate rewards than long-term wealth-building. Gamified features such as real-time notifications and social media integration can lead to impulsive, high-risk trades based on FOMO (fear of missing out) or hype, rather than careful, researched decisions.
• Short-Term Focus and Impulsive Trading: Gamification promotes instant gratification, which is counterproductive to the patience and discipline needed for successful investing. Over time, this impulsive behavior reduces long-term returns, as frequent trading tends to incur more costs and taxes, and often leads to buying and selling at inopportune times.

4. Hidden Costs of Commission-Free Brokerages: The Price You Don’t See

While commission-free brokerages may seem appealing, there are hidden costs that investors need to consider:

• Routing Order Flow and Payment for Order Flow: Commission-free platforms often make money by selling order flow to market makers and other institutional investors. These market makers then execute trades at a price that may not be in the best interest of the investor, leading to suboptimal execution prices and potentially higher costs for the individual.
• Incentivizing Risky Trades: Some commission-free platforms encourage higher levels of trading by making it easy to execute trades quickly, while others provide instant margin to users. This can lead to excessive trading and greater exposure to risky assets, ultimately reducing long-term returns and increasing the likelihood of financial losses.
• Hidden Revenue Streams: While investors may think they are saving money on commissions, the hidden costs associated with order routing, market maker relationships, and price slippage can make commission-free investing far more expensive than it seems at first glance.

Conclusion: The Risks of Gamification and Commission-Free Brokerages

The rise of gamification in investing and commission-free brokerages has democratized access to the stock market, but it has also created a risky environment for individual investors. While gamified platforms provide immediate excitement and ease of use, they can encourage impulsive decisions, higher trading volumes, and ultimately lower long-term returns. Furthermore, commission-free platforms often hide their true costs through order routing and payment for order flow, which can reduce the value for the investor.

To achieve financial success, investors should focus on long-term strategies, avoid frequent trading, and be mindful of hidden costs. Rather than being swayed by the immediate rewards of gamified platforms, it’s important to approach investing with patience, discipline, and a focus on wealth-building over time.