Gamification Of Robinhood | The Acquirer's Multiple®

During their recent interview on The Acquirers Podcast with Tobias, Dr Richard Smith, PhD in Systems Science discussed Gamification Of Robinhood. Here’s an excerpt from the interview:

Tobias: When I look at Robinhood, I think that there are two issues. One is that, we don’t necessarily know what’s happening to that order flow and it might be front run or used in some other way. But if ultimately that allows you to trade more cheaply and in a more illiquid stocks, more easily, then it’s probably a good thing. The other problem, which I think is possibly the bigger problem with Robinhood is the gamification if you like all the experience from the perspective of a user when there’s a lot of– They’ve imported those Silicon Valley’s social media dopamine hacking elements that make you want to do things on the site. You get confetti going off, and they simplify an option trade even for experienced investors is a reasonably complex thing.

You’ve got to think about are you getting sufficiently compensated on the volatility side? There are lots of other– is the underlying where you want it to be, or it’ll end up being where you want it to be? They’ve condensed all of that down into, do you think the stock is going to go up or down, or do you think the security is going to go up and down, which is potentially too simple. To your point about the addiction side that dopamine hacking is certainly an addiction.

Dr. Richard: I’ve just been finished up a book called Dopamine Nation. It’s a new book out right now by Stanford psychiatrist and Director of the Medical Addiction Center or something like that, Dr. Anna Lembke, wonderful book. Not a lot of behavioral finance in it, but she does talk about some research around gambling for example. The four things that really trigger dopamine release in the brain in the neuro transmitters, one is, getting a reward. Two is, anticipating a reward. We’re doing that all the time. Every time we look at the screen, we’re thinking, “Oh, am I going to get a reward?” Even if it’s just a temporary paper reward. The markets up today, my portfolios up today, whatever.

Then three, another one is that, if it’s a rich complex environment with lots of learning opportunities, that’s another thing that elevates dopamine levels. You can spend your life learning about markets. [laughs] That is a rich complex environment that you can learn a lot. Then the fourth one that really was particularly relevant is that, if the environment is highly randomized, if it’s really like 50-50, that’s the maximum situation where dopamine is released in your attempts to one anticipate reward and try to solve for reward. That actually ends up in gamblers, it produces what’s called loss chasing.

You actually enjoy losing for a while, because the outsized thrill you’re going to get when you finally get that reward. Meanwhile, we know markets don’t tolerate loss chasing indefinitely. [laughs] As John Maynard Keynes said, “Markets can remain irrational longer than we can remain solvent.” Risk of ruin is a big issue. It does eventually catch up with loss chasers. All these things are going on in the markets and they’re creating a very addictive relationship with our screens and with the markets. The presence of dopamine is an indication of an addictive experience, whether it’d be drugs or retail financial markets. So, all of that is going on, going back to my wish for transparency. If Robinhood would disclose, what they’re gamifying and what they’re making money on, I’m pretty certain that we’d find a correlation between those things.

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