Gamification: Regulators Should Try The Investor Education Game

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The controller has been passed to a new team of players in Washington. New players prefer to hit the reset button and start a new game, not pick up where the prior player left off. We know how our new players like to play the game. They want to control every aspect of the game through regulation, occasionally, using the cheat code to attempt to regulate by enforcement. Securities regulators’ recent interest in gamification exemplifies just that.

According to Merriam-Webster, “gamification” is “the process of adding games or gamelike elements to something (such as a task) so as to encourage participation.” Google’s dictionary provides a similar definition: “[T]he application of typical elements of game playing (e.g. point scoring, competition with others, rules of play) to other areas of activity, typically as an online marketing technique to encourage engagement with a product or service.” Some broker-dealers have employed this marketing concept to their trading platforms in an effort to encourage investors traders to trade more, and thus to generate more revenue for the broker-dealers. In other words, for-profit entities have enhanced their services to differentiate themselves from their competitors by making their services more attractive to consumers in an effort to generate more revenue.

I fail to see the problem with the use of gamification in the broker-dealer industry. It does not directly or proximately cause losses to the consenting adults who choose to trade securities. The performance of the securities that grown men and women choose to buy and sell is dictated by the performance of the securities, not whether confetti pours down, or firework light up, the screen after profitably closing a position. There also is nothing misleading about gamification. I highly doubt that there are any traders, even neophyte traders, who actually believe they cannot lose money buying and selling securities. Broker-dealers disclose those risks in spades. Even gamers know they are not going to win every game they play. Trading securities is no different. You make money on some trades and you lose money on others.

So what exactly is the problem with broker-dealers adding game-like features to their trading platforms? One SVP at FINRA was quoted in a recent article as describing the problem to be: “The real danger here is that investors may be making decisions that are contrary to their own financial goals.” (Emphasis added.) In other words, it is possible that gamification might cause some investors traders to make poor decisions. The reality of the situation is that people who indiscriminately trade securities just for the confetti and fireworks screens, instead of the bottom line, are apt to make poor decisions, with or without the special effects and irrespective of where they fall on the platform’s leaderboard. While there apparently is uncertainty regarding the causal connection between gamification and poor trading decisions, there is no uncertainty that inexperienced and unsophisticated investors are more likely than experienced and sophisticated investors to make poor investment decisions.

FINRA now has a working group dedicated to gamification. Both the SEC and FINRA will be seeking public feedback on gamification. The regulators apparently need testimonials and data to tell them that the more user friendly and exciting a product is, the more likely a consumer is to use and enjoy it. Gamification is widely used to make the mundane more enjoyable. It even makes some human resources and other training and educational endeavors bearable. I have no doubt it has the same intended effect on trading platforms.

Setting aside the new regime’s need to regulate anything and everything, another problem with regulating gamification is assessing where to draw the line. Sure, there are easy things to address, such as leaderboards, but there is also a lot of grey area. Drawing lines will be challenging, if not impossible. If a customer profitably closes a position, what is the limit on how a broker-dealer can convey that generally good news and what is the basis for the limit? Is confetti okay? Money bag emoji? Smiley face emoji? Cha-ching sound effect? A flashing “Congratulations!”? A simple “Congratulations!” Or is that all too much? On some platforms, daily and overall unrealized losses on each position are in red font and daily and overall unrealized gains on each position are in green font. Is this too far? Does this cause some people to sell all of their reds to accumulate greens? What about the “buy” button? What can that permissibly look like?

We all know how this game will end. The SEC and FINRA are not going to pass the controller. Their efforts likely will result in guidance and/or rules on gamification. They believe gamification adversely affects some traders, albeit ignorant ones, so they will act, and likely will overreact, in their efforts to be the perceived champions of main street. Hopefully, they act through guidance and rulemaking, not enforcement. Because the posterchild for gamification appears to be surrounded by Inky, Blinky, Pinky, and Clyde without a Power Pellet in sight, it would not surprise me if they go the enforcement route.

The truth of the matter is every dollar and ounce of energy spent by regulators on gamification in an effort to protect the ignorant would be much better spent on investor education. As Benjamin Franklin observed: “An investment in knowledge pays the best interest.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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