Anyone who has shopped for groceries with a toddler knows to be on high alert for the impulse items the store has thoughtfully placed at a child’s eye level. And these days, grown-ups who invest using web platforms or mobile apps must also be on high alert for carefully placed virtual nudges that might encourage impulsive trades.
A growing body of research has found that many seemingly innocuous design decisions embedded in investment websites or apps—such as replacing check boxes with swipes or highlighting lists of stocks that have had the biggest price moves—can encourage investors to trade more. That can generate profits for the brokerage, but research has long shown that it can also reduce investors’ long-term returns.
Brokerages are in a bind: On the one hand, they want to make their sites as engaging, easy to use and profitable as possible. But they also need to retain their customers’ trust.
And regulators are watching as investing moves increasingly online. “Securities regulators have been focused on digital engagement practices to ensure that these technological advances incorporate adequate investor protections,” says Amanda Senn, director of the Alabama Securities Commission. “They should not be allowed to encourage poor investment practices or incorporate manipulative tactics.”In January 2024, for example, Robinhood Markets settled charges by the Massachusetts Securities Division and agreed to eliminate from its app game-like features such as digital confetti that celebrated trades. Although Robinhood did not admit or deny any wrongdoing (and it had removed the confetti back in 2021), as part of the Massachusetts settlement, the firm also agreed to stop sending out emoji-laced e-mail messages about the day’s “top movers,” which the state agency argued prompted recipients to make impulsive trades. (Robinhood did not respond to requests for comment for this article.)
Brokerages have tamped down on most of the game-like features, regulators say. Still, worrisome “dark patterns”—the term for design choices that users may not realize are steering them to take certain actions—remain. Dark patterns are typically made up of two kinds of design choices: “nudges,” which encourage users toward some action, and “sludge,” which makes it more difficult to take an action.
- Urgency
But James Tierney, an assistant professor at Chicago-Kent College of Law and former attorney for the Securities and Exchange Commission, says that by highlighting short-term news and returns, brokerages “are pushing the idea that there are short-term swings in prices that are potentially tradable and profitable. This gives rise to the false belief that by trading you can capture those gains…. And there is a ton of academic research showing the more you trade, the worse you do.”
- Ease
And in a January 2024 report, the Ontario Securities Commission said it was concerned about U.S. and Canadian investing websites and apps that enabled “one-click trading,” rather than the more typical practice of requiring a second step to confirm orders. The commission said it was also monitoring apps and sites that made it easy for unsophisticated investors to start trading options. And it alerted investors to notice mobile apps that enable trade confirmations with a swipe.
A recent experiment found that users made larger investments when they could execute trades using swipes instead of clicking checkboxes. The commission said that investors are better served when platforms inject a little extra “friction into processes where it is known that users are making fast decisions—for example, placing a trade—to help prompt vigilance and thoughtfulness in decision-making.” Investors can think of such friction as “good sludge.”
