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Investors Influenced by Gamification, OSC Finds

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The Ontario Securities Commission (OSC) partnered with the Behavioural Insights Team to conduct a behavioral study on how digital investment platforms may influence retail investors' decisions in a way that impacts outcomes – both positively and negatively.   The digitalization of financial services and the introduction of mobile-friendly investment platforms have increased investment opportunities for retail investors, which in turn have put investors at the mercy of these platforms. Investment platforms employ gamification and other behavioral techniques as part of their digital engagement practices (DEPs).

The tactics used by investment platforms broadly referred to as “gamification,” use insight from behavioral science to influence investor behavior. The OSC conducted a randomized controlled trial in which 2,430 participants were given $10,000 in play money to buy and sell stocks in a simulated, digital trading environment. The experiment assessed the impact of two common tactics on investing behavior.

  1. Giving investors points for buying or selling stocks — a gamification technique.
  2. Showing investors a list of top traded stocks.

Gamification could lead to poor, influenced decisions. Gambling, for example, has some inherent characteristics of gamification; combined with the extra gamification techniques used by online betting and casino platforms, gamblers are lured slowly into gambling addiction.

The intentional and unintentional misuse of gamification techniques by investment platforms has raised investor protection concerns, hence the OSC experiment and report. An Investor Advocate in the U.S. Securities and Exchange Commission (SEC) had previously expressed concerns about gamification and the need for investor protection. In an October 2021 speech by Rick Fleming, former SEC Investor Advocate, he pointed to a major development since 2019, which he called the so-called gamification of retail stock trading. Rick Fleming said his primary concern with gamification is its potential to induce trading that is more frequent or higher risk than investors would choose for themselves in the absence of DEPs.

What Does The OSC Gamification Report Reveal?

The report outlines a taxonomy of gamification and other behavioral techniques currently employed or with high relevance to retail investing, and their potential implications for investor behavior. Five main gamification techniques were examined in the experiment; they include, “gamblification” – techniques derived from gambling which include the use of variable rewards, and the use of language and imagery that evoke gambling; leaderboards, rewards (negligible or non-economic rewards such as points, badges, scores), goal and progress framing, and feedback. Four other behavioral techniques were examined: salience / attention-inducing prompts, simplification and selective deployment of friction costs, social interactions, and social norms. These behavioral and gamification techniques are collectively known as digital engagement practices (DEPs).

The U.S. SEC defines DEPs as “the tools including behavioral techniques, differential marketing, gamification, design elements or design features that intentionally or unintentionally engage with retail investors on digital platforms as well as the analytical and technological tools and methods.” Gamification refers to a variety of behavioral techniques that integrate game-related elements into non-gaming contexts and applications, to improve user experience and engagement. Gamification techniques are a subset of behavioral techniques; DEPs are a superset of both.

Source: OSC Staff Notice 11-796

Source: OSC Staff Notice 11-796

Key findings from the experiment reveal that participants who were rewarded with points made almost 40% more trades than participants who were exposed to the same trading simulation but were not rewarded any points. Although the points awarded in the simulation had negligible value, participants that were recipients of points showed significant naiveness to this gamification technique.

The top traded list technique used in the experiment also reveals that participants who were shown top traded lists were 14% more likely to trade the top listed stocks. This finding suggests that showing investors a top traded list can affect their trading decisions.

Investment Platforms Urged To Act Right

The OSC identifies that its experiment and report on gamification are not exhaustive in identifying how gamification and other behavioral techniques are being used on investment platforms today. It, however, believes that the experiment and report reflect a reasonable cross-section of the techniques being used by self-directed investment platforms.

The OSC has always been on the lookout for bad actors and violators of its securities laws. In July, the OSC enforced regulations to limit or completely ban the activities of non-compliant crypto exchanges. Bybit violated a set of the OSC's securities laws, which resulted in a heavy fine on Bybit. Other crypto exchanges that have been affected by the OSC’S regulatory developments include Bittrex and KuCoin.

The OSC says Improving the investor experience and expanding investor protection is its priority, and it expects that platforms will use the knowledge revealed by the gamification experiment to focus on techniques that support good investor outcomes.

Mandela has been a cryptocurrency enthusiast since 2017. He loves coding and writing about emerging technologies. He has an in-depth understanding of distributed ledger technology and the Web3 technology stack. He enjoys researching new cryptocurrency projects.