Will Robinhood actually create wealth for the Millennials?
“It’s virtually impossible for young workers to deploy their investment capital too aggressively, because their human capital overwhelms it.” -William Bernstein
Millennials are more likely than others to be skeptical of stock market as they are the ones who watched the 2008 crash from sidelines, which destroyed their parents wealth and a challenging job market when they graduated. Robinhood , the most popular “investing” app for millennial generation has convinced them finally to join the stock market. Its a great app, sleek user experience, simple elegant design and hassle free on-boarding . Even better, It costs nothing to trade.
Their vision:
“Dedicated to providing free access to the financial markets and inspiring a new generation of investors”
Still not convinced? Average user age is 28 and 2 Million Users!
But like with all good things, I am a big believer of :
“Your greatest strength is your weakness”
Robinhood suffers from the same “Spike Dopamine, Create a Instant gratification feedback loop”, just like Facebook. So basically its a modern age tobacco — Quick buy and sell without thinking too much. Yes you have less noise compared to other brokerages. But it just worsens the decision making process with the intuitive design, the messages they convey through colors!
Sample Trade Flow — You own FB stock, You see its down by -0.41%!. Its highlighted in RED as you see below on left. Your Response, let me check what is happening — by clicking on news!
“OMG everyone is quitting facebook”, you see articles like “FB is at Tipping point” Your response is to SELL, but the reality is different. Look at the big picture below and what you read was likely to be “noise”.
So as you can see the sleek UX and intuitive design did nothing to help you in making a better decision at all. It actually made it worse — You are able to buy and sell based on “how you felt”at that moment.
So Robinhood has to solve this aspect of behavior if they really want to help in creating better generation of investors. Your users are going to churn if they are losing money [“Entire Stock market is a scam!”].
So what can Robinhood do?
- Incentivize long term holdings as you can see above, longer you hold its tough to lose money. Its actually impossible when you hold for >20 years*], charge upfront fees if they sell early. Surprisingly traditional brokers like Fidelity do a good job of highlighting fees[Commission Free trades cost you if you sell it within 30 days].
Another one could be a Pop up for “YOU PAY MORE TAXES” if they sell within a year and show them insights how taxes eat your profits.
2. Less Emphasis on charts and more emphasis on facts: Right now people trade random stocks and etfs without understanding risks [Hello XIV!] as its “FREE”. People see 5x stock gain in a year and put their money into it, They can at-least display what sector a stock is or what that ETF contains.
3. Invert the colors : Probably my most controversial suggestion , Use Green when stocks are down [“Stock is at a discount today”**], Red when everything is up, Else just choose neutral colors for both.
In the end, Its great that they have got many young investors to get excited about stock market. They have bought it to a generation which was very reluctant to get into investing at all.
* Yes I know this theory doesn’t work if you were a Japanese investor .
** There are other risks like price anchoring biases.
Next part: https://medium.com/pfquant/an-introduction-to-quantitative-finance-investing-pt-1-ffa60ef57185
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