Apps make trading stocks feel like a game, but that may not be a winning investment strategy

·3 min read

Not long ago, Robinhood would reward users of its investing app who made their first trade by dropping confetti.

That experience, critics say, is an example of how investing apps have attempted to turn elements of stock trading into a game, a technique called gamification.

In March, Robinhood removed the confetti in favor of "dynamic visual experiences that cheer on customers through the milestones in their financial journeys."

But the worries over gamification haven't disappeared. Last month, the Securities and Exchange Commission announced it was seeking more information on digital engagement practices such as "game-like features" used by brokers or investment advisers.

In a statement, SEC Chair Gary Gensler said many of these new technologies such as Robinhood raise questions about whether investors are adequately protected.

"In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy," said Gensler.

What is gamification?

Gamification involves taking an activity, like investing, and adding elements typically found in video games to keep users engaged.

Think of a role-playing game, for example. You complete a task, you earn a reward. In the case of Robinhood, you invite a friend and they join the service, both of you earn stock as a reward.

How you define gamification depends on your perspective, said James Angel, an associate professor at Georgetown University's McDonough School of Business who specializes in market regulation. Some may see it as adding fun to an experience, while others might view it as a way to manipulate users to stay hooked.

"It’s one of those words we think we know what it means, but it means different things to different people," Angel said.

Its impact on the brain

Apps using gamification tap into chemicals in the brain that allow us to experience pleasure, said Read Montague, director of The Center for Human Neuroscience Research at Virginia Tech University.

Our brains love uncertainty and the potential rewards that await, like when you invest in a stock and watch its price spike, Montague said

"Uncertainty means there's something over there that you didn't know about," he said. "It may be hiding some set of great riches, and you really, really want to go look at that."

This is where a potential investor can find trouble, said Michael Sury, a lecturer with the McCombs School of Business at the University of Texas at Austin.

"If you start treating investing or even trading as a game, then you lose," he said. "It becomes an emotional activity as opposed to a rational activity."

Is gamification that bad?

Angel argues investing apps like Robinhood aren't doing anything different than what other websites have done since the birth of the internet.

"The notion that you’re somehow turning investing into an addictive video game, you could probably say that about online shopping," he said. "You could probably say that about almost any online experience where people try really hard to make the customers come back and keep the customers happy.”

Those same features maligned for turning investing into a game have also helped new users intimidated by stock trading learn and ease them into building a portfolio or figuring out basics like how to trade a stock.

"It gives them an entertaining way to want to access this information and that can be really positive," said Sury.

But Sury warns having a solid financial plan in place and understanding your goals can help new investors avoid the traps of apps like Robinhood.

"There are going to be times when you happen to be lucky and there'll be other times when you aren't," he said. "I think that's the first step is to understand how much risk you can take and what you're trying to achieve."

Follow Brett Molina on Twitter: @brettmolina23.

This article originally appeared on USA TODAY: Robinhood and other apps make stock trading feel like a game