Tamara Kostova, CEO of Velexa, empowers institutional clients through customized and embedded investing services.
Behavioral factors can adversely affect investment decisions. A study by Morgan Stanley revealed that the average U.S. investor received about 55% of the potential returns from a balanced portfolio over the last 30 years. The compound loss adds up to a loss of as much as $840,000 for a $100,000 investment.
Emotional decisions and decisions swayed by various biases can cause investors to take action when they shouldn’t, or to hold back when they should act decisively.
Gamification techniques designed with knowledge of these biases provide an unexpected solution to help investors. Whereas gamification is often used for the sole purpose of increasing participation in an app or service, the same techniques can be used to help users deepen their understanding of their investments, and so make better decisions.
Considering The Purpose Of Gamification
Like all design and UX principles, gamification can be used for good and bad purposes. A gamification approach that preys on behavioral aspects would be considered bad. For example, a timer that pressures an investor to rashly take a position without considering all the factors, preying on the investor’s fear of missing out (FOMO), would be a bad use of gamification.
On the opposite side of the spectrum is Duolingo, the gamified app in the education space. The company openly uses gamification techniques to engage users and help them keep learning.
Gamification is used successfully in multiple sectors. For example, in healthtech, a gamified Nintendo DS experience rewards children for testing their glucose levels frequently. In the food and beverage sector, loyalty programs encourage users to earn points for each purchase, often resulting in a free gift when they attain their next level.
How Wealthtech Can Address Common Investor Biases
According to the Morgan Stanley study linked above, investors are adversely affected by seven common cognitive biases. Here’s how gamification could be used to help investors overcome these biases:
1. Confirmation Bias
Humans tend to seek information that confirms what they already know and reject information that contradicts it.
For example, an investor who believes strongly in a particular sector might only read analyst reports that support their bullish view while dismissing negative industry research or market warnings. They might focus exclusively on positive metrics while ignoring concerning indicators, leading to suboptimal investments and positions.
Potential WealthTech Solution: Implement a “Perspective Dashboard” that displays contrasting viewpoints and metrics. When users research a sector or stock, the platform could gamify balanced research by awarding “Analysis Points” for reviewing both bullish and bearish cases. Create an “Opinion Diversity Score” showing how varied their information sources are, with rewards for maintaining a balanced perspective.
2. Loss Aversion
People react more strongly to loss than to gain. Given two equal decisions, humans will tend to take the one with the least loss potential, instead of the one with the most gain potential.
We saw this play out during the 2020 market crash, when 42% of American investors in a study sold at least one stock, locking in losses. Even though historical data showed that markets typically recover, the fear of further losses outweighed the potential for recovery gains. Those who sold missed the subsequent rally a few months later.
Potential WealthTech Solution: Develop an interactive “Recovery Simulator” showing historical market recovery patterns. Create a “Loss Context Calculator” that visualizes both potential losses and gains in equal measure, using behavioral design to make gains equally emotionally impactful as losses.
3. Overconfidence Bias
Humans tend to be overconfident of their own abilities.
For instance, a day trader might have success with a few cryptocurrency trades during a bull market, leading them to believe they have special market timing abilities. This overconfidence could cause them to misjudge trades, thus leading to significant losses.
Potential WealthTech Solution: Build a “Trading Performance Analyzer” that compares a user’s actual returns against market benchmarks and their own predictions.
4. Recency Bias
Our minds place more relevance and emphasis on recent events, even if older events are more significant in an analysis.
Recency bias was common following the strong tech stock performance of 2020-2021, when many investors increased their allocation to high-growth tech stocks, expecting the trend to continue indefinitely. This recency bias led to overexposure just before the 2022 tech stock correction, where some tech stocks declined 40% from their peaks.
Potential WealthTech Solution: Create a “Time Machine Portfolio” tool that shows how similar market conditions played out in the past.
5. Anchoring Bias
Anchoring bias is the tendency to focus too heavily on the first piece of information received. This can lead to fixed ideas about a changing economy or economic position.
For example, an investor who bought shares at a higher price might refuse to sell when the stock drops by 50%, anchoring to their purchase price. This anchoring prevents them from objectively evaluating changing market conditions.
Potential WealthTech Solution: Include a “Price Evolution Timeline” showing how factors have changed since their initial investment.
6. Herd Mentality Bias
Herd mentality bias refers to a tendency to do what everyone else is doing.
An example of this occurred during the 2021 “meme stock” phenomenon. Many investors bought GameStop shares simply because of social media suggestions, without understanding the underlying business fundamentals or risks. This led to purchases at unsustainable price levels, followed by $13.1 billion in losses when the hype faded.
Potential WealthTech Solution: Implement a “Hype Meter” that automatically flags when social enthusiasm might be disconnecting from fundamentals.
7. Ambiguity Aversion
People tend to prefer predictability and avoid uncertainty.
For instance, an investor might consistently choose bonds with lower, fixed yields over dividend-paying stocks with a higher yield, simply because the bond payments are more predictable. Even though the dividend-paying companies have strong financials and decades-long histories of increasing payments, the investor opts for lower but more certain returns.
Potential WealthTech Solution: Include interactive simulations that demonstrate how different investment vehicles work under various market conditions, with clear explanations of risks and mechanics.
Gamification can be a strategic differentiator. When you empower users by discovering their biases and then assist them to overcome them, they may even perceive your platform as better than a competitor’s.
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