A study from the Ontario Securities Commission’s (OSC) Investor Office found that small rewards, even those with no real value, tend to have a significant impact on retail investors — making them more engaged and eager to trade, regardless if it increases the risk of losses.
“It is easier now to start investing thanks to digital platforms, but those same platforms may influence retail investor decision-making in a way that impacts outcomes — both positively and negatively,” said Tyler Fleming, Director of the Investor Office at the OSC. “Our study examined and tested gamification and other behavioral techniques and their likely impact on retail investor behavior.”
Central to the study was an experiment where the OSC examined the impact of two prompts on retail investors: ‘gamification’ or giving investors points for buying or selling stocks, and showing them a list of the top traded stocks. The experiment’s 2,430 participants were $10,000 in play money to buy and sell stocks in a simulated, digital trading environment.
They found that participants who were given points for buying and selling stocks made 39% more trades than those in the control group. The study also noted that points they received as a reward for trading had “inconsequential” economic value.
“Increasing the number of trades investors make is important because, on average, trading more frequently has a negative impact on investor returns,” said the OSC. “The concern that certain techniques may result in investors trading more is amplified given that low or no commission trading has reduced barriers to entry, and retail investors’ trading volumes have grown considerably.”
They also found that participants who were given the list of the top traded stocks did not necessarily trade more, but when they did 14% were more likely to trade the stocks that were on the list.
“This suggests that showing participants a top-traded list can affect their trading decisions, nudging them to buy and sell stocks on the list. This can result in herding — a behavior where a person follows what others are doing rather than deciding independently,” the OSC said.
The OSC emphasizes that the results of the study reinforce “the importance of using behavioral science as a policy tool by regulators.” They recommend that more studies be done and for regulators to “consider the implications of the findings,” determine whether investor protection issues would come up from these kinds of tactics or techniques, and “consider possible responses,” if such issues arise.
Information for this briefing was found via the OSC, and the sources and companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.