Online trading platforms have faced scrutiny for using “gamification” techniques to drive investor behaviour that benefits the firm, but not necessarily the investor — such as games that encourage active trading that generates trading volume for the firm, but may undermine investors’ returns. New research from the Ontario Securities Commission (OSC) indicates that these same tactics can also be used for good.
In a new report, the regulator examines the possibility of using gamification to lead investors to make smart decisions, such as increasing portfolio diversification.
The report detailed the results of an online experiment that tested the impact of various techniques on boosting investors’ diversification decisions — including awarding badges for meeting diversification targets, posting leaderboards, providing investors with real-time diversification scores, and setting diversification goals and tracking progress. It found that all of these techniques had a small, positive impact.
The experiment, which was carried out with 4,000 adults allocating a hypothetical $10,000 across eight stocks, found that the various techniques produced a 3.5% to 4.5% increase in portfolio diversification.
Alongside the experiment, the regulator’s research also highlighted “both proven and promising strategies to mitigate the risks associated with harmful gamification in retail investing,” such as measures designed to help investors avoid potentially harmful gamification tactics.
“Our review found promise in educational interventions, enhanced disclosure mechanisms, and friction-based interventions (e.g., requiring a confirmation step before high-risk trades),” the report noted. “These strategies can help investors make more deliberate and informed decisions, reducing impulsive behaviours often triggered by gamified trading environments.”
Based on its findings, the OSC’s report cautioned regulators to avoid taking action against gamification that prevents possible positive uses for these techniques.
“Some platforms have started using gamified features to encourage long-term investing and reduce impulsive behaviours,” it noted.
Additionally, the report also called for more research and regulatory policy development to support the positive uses and mitigation measures; and, it recommended that regulators and policymakers utilize gamification in their investor education efforts.
“Understanding the behavioural impact of gamification is critical to ensuring that digital engagement practices support, rather than undermine, investor outcomes,” said Kevin Fine, senior vice-president, thought leadership at the OSC, in a release.
“Gamification techniques can put investors at risk, but when used thoughtfully, they can encourage positive behaviours like portfolio diversification,” he added.