Robinhood’s Gamification of Investing
Before Robinhood, it was widely believed that participating in the stock market was reserved for the wealthiest members of society and institutional investors because of the many barriers to entry. Vladimir Tenev and Baiju Bhatt, the co-founders of Robinhood, sought to create a platform that “democratized” investing, making it available to anyone with as little as a few dollars in their bank account. In 2013, Robinhood was born and began offering commission-free trading to all its users. As of 2022, Robinhood has over 15 million monthly active users and over 22 million funded accounts. While Robinhood was built with the mission of providing everyone access to financial markets, it still participates in business that favors the wealthy.
“If something is free, you’re not the customer; you’re the product” is a well-known expression that has become increasingly popular as the world becomes exponentially more digital. Robinhood, despite portraying a user-first agenda, is using the millions of consumers that choose to trade on their platform as the product for large investment firms behind the scenes. Driven by its revenue model, Robinhood acts against the best interest of its users by incentivizing them to trade more frequently through the gamification of its user interface.
According to Bloomberg, Robinhood earns almost half of its revenue from payment for order flow. Payment for order flow is a system where instead of using a stock exchange to execute customers’ trades, a broker will route trades to a market-making trading firm in exchange for a fee. In Robinhood’s case, it will sell users’ trades to a market-making firm, like Wall Street giant Citadel, which will pay Robinhood a fee for doing so, and then the firm will make a profit from re-selling the shares on the open market for a higher price. Robinhood earns less than one cent per share for routing these trades to firms like Citadel, but since users have executed over $150 billion in transactions, payment for order flow revenue adds up for the platform. Since this part of its revenue model is positively influenced by users conducting more trades, it may incentivize Robinhood to encourage users to do so even if it is not in their best interests.
The main way that Robinhood influences its users to trade more frequently is through the gamification of its user interface and experience. Gamification is the technique of inserting game mechanics into non-game products to make them more entertaining. Through gamification, designers aim to help increase user engagement and retention. In its platform, Robinhood has strategically created mechanics that reflect key technological affordances. Technology requests and demands responses from its users, moving them upon given paths with different levels of insistence. These requests and demands are integrated into Robinhood’s interface, pushing its users to follow through with certain actions, and providing as much friction as possible before allowing them to do others. By welcoming a particular action with minimal barriers, Robinhood is encouraging. When it creates a barrier, it's discouraging. Lastly, when Robinhood makes a certain line action seem almost impossible, it's refusing. These different affordances are easy to notice as Robinhood users navigate the platform, learning what they can and can’t do, and see where the developers want their attention to remain.
When Robinhood users made their first trade, they used to be greeted with a confetti shower to celebrate their first investment. After backlash, this was later changed to a shower of geometric blocks that serve the same purpose. This mechanic is aimed at invoking a feeling of satisfaction and joy within users to encourage them to do more trades with the hope of being rewarded by the app. Also, all users have to do to confirm a trade is swipe up, which serves to request they do so since the line of action is so simple. On the other hand, Robinhood creates more barriers for users to cancel a transaction which discourages it and can steer users away from doing so. Another action by Robinhood that requests and encourages users to trade more is gifting a free stock each time a user refers the platform to a friend. Users find out the free stock by scratching off an on-screen lottery card, simulating a feature that is included in many games. Lastly, Robinhood has implemented an on-screen emphasis on trending stocks, highlighting rising share prices as an incentive to buy and falling share prices as an incentive to sell. This feature requests attention from users and encourages them to engage in the platform’s suggested actions.
In December 2020, Robinhood’s user interface came under fire when Massachusetts state securities regulators filed a complaint against the company, alleging they aggressively marketed to novice investors and exposed them to unnecessary trading risks. Stock broker-dealers like Robinhood are supposed to always act in their client’s best interests. The complaint filed by Massachusetts claimed that by encouraging users to make more trades through engaging and gamified features, they were doing the opposite.
In addition to its inclusion of gamified features to encourage users to make more frequent trades, Robinhood has also faced criticism for not doing enough due diligence when approving users for margin trading, possibly resulting in the death of a young adult. Margin trading occurs when a user conducts a trade using borrowed funds from a third party; in this case, Robinhood. Margin trading can be incredibly dangerous because if a user is unaware of the potential damage when a trade goes poorly, they may owe Robinhood much more than they expected. Robinhood makes interest when they lend funds to users, so they purposely allow for low barriers to entry so that they can increase their revenue. In March 2020, these low barriers to entry are how 20-year-old user Alexander Kearns was able to start trading on margin using Robinhood. New to the stock market and to the platform, he was unaware of the power and dangers of margin trading. Unfortunately, Kearns took his own life when he checked his Robinhood account, and it had a negative balance of over $730k. Kearns, with almost no personal income, was able to get assigned almost one million dollars worth of leverage through the company’s margin trading services. In a final note, he even wrote that he had “no clue” what he was doing. This story is incredibly tragic and shows how Robinhood’s lack of due diligence in return for the pursuit of more profits can have a detrimental impact on its users' well-being.
Throughout the research for this post, I spent time on my own playing with Robinhood’s mobile application and wanted to see if I could gain first-hand experience with some of the criticisms that have been written about the popular investing platform. Since I came in with a skeptical perspective, as I started to make trades and get deeper into Robinhood’s interface, I was able to quickly understand what others meant when referring to how it encourages trades and discourages selling shares or not making specific trades. The interface reminded me of mobile phone games I used to play during my youth, with its rewarding animations, colloquial captions, and ease of use. Unlike those games, I was using real money that had to potential to cause damage if I was not cautious with my decisions. While it was great that I was able to take part in investing in the stock market with ease, unlike how it was for many years, it was concerning how easy mistakes could be made if a user was less educated on investing and didn’t know the damage they could.
Robinhood’s user interface is designed to encourage its users to execute more trades because that is how Robinhood makes more money. As with any profit-seeking firm, Robinhood has the incentive to grow to satisfy its shareholders and investors. While they have been able to bring their goal of democratizing investing through commission-free trading to life for millions of users, they did so at their expense as well. Despite trying to make the industry accessible to all, in order to be successful, Robinhood still relies on the giant Wall Street financial firms, that they were hoping to disrupt, for most of its success and profits. Robinhood acts opposite the favor of its users by encouraging them to make decisions that may not always be in their favor by incentivizing increased trade volume through a game-like user interface and specific platform mechanics.
