Luring active investors with tiny rewards can have a huge impact on their trading behaviour, an experiment carried from the Ontario Securities Commission’s (OSC) Investor Office found.
In a staff notice published on Thursday, the OSC detailed the results of its study of investor gamification techniques and other tactics for driving investors’ behaviour. As part of the study, the regulator conducted an experiment to examine the impact of two nudges: rewarding investors with points for trading stocks and showing investors a list of the top-traded stocks.
The experiment, which involved a randomized controlled trial of 2,430 participants in a simulated digital trading environment, found that investors who were provided with points (of “inconsequential” economic value) carried out 39% more trades than investors who weren’t offered points for trading.
“Increasing the number of trades investors make is important because, on average, trading more frequently has a negative impact on investor returns,” the OSC said in a release.
“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,” it said.
Separately, the experiment also found that investors who were shown a list of most actively traded stocks were not more active traders, but they were 14% more likely to trade the stocks 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 behaviour where a person follows what others are doing rather than deciding independently,” the OSC said.
Given its findings about the efficacy of these tactics, the report recommends that regulators determine whether investor protection concerns arise from the use of these kinds of behavioural techniques, and if so, to “consider possible responses.”
It also recommends collecting more data on the impact of gamification and other behavioural tactics, researching strategies to mitigate the negative impacts of these practices and reviewing the possible positive impacts of these techniques.
“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 OSC’s Investor Office, in a release accompanying the report.