Selling Users Short: Frictionless UX Isn’t Always Better When It Comes To Investing

Their presence brought a new dynamic to the market, crystallizing in last year’s ‘memestocks’ craze. What started as a discussion on Reddit about untapped value at GameStop morphed into a crowdsourced campaign to bring a hedge fund to its knees.

In many ways, this was nothing new: hedge funds make losses all the time. But the fact it was engineered by retail investors was unlike anything Wall Street had seen before.

A key enabling force in all this has been the rise of app-based trading platforms. Offering commission-free trades, no account minimums and a slick user interface, these platforms have removed virtually all of the friction from investing.

However, while app-based platforms may make investing easier than ever before, they also bring new and unique risks.

The Dark Side of Experience

As we know, a good digital experience can be all-consuming, absorbing your attention and even encouraging unintended behaviours. Invariably, this is the result of specific techniques by product owners. While this may be seen as broadly acceptable in e-commerce or social media, when these same techniques are applied to investing, things start to get a bit problematic.

That’s because techniques such as gamification can distort the true nature of the market, resulting in warped decision-making and excessive risk-taking – neither of which are helpful when it comes to investing.

In fact, according to many experts, the best way to invest is to do as little as possible.

The Importance of Being Idle

If there’s one thing I’ve learned from my short time in investing, it’s that it pays to be lazy.

Indeed, the world’s foremost investor, Warren Buffet, is such a fan of lazy, or ‘passive’, investing, that in 2008 he bet a hedge fund a million dollars that over ten years they wouldn’t be able to beat the performance of an index passively tracking the US stock market.

In the end it wasn’t even close: Buffet’s S&P 500 index fund returned 126% over the decade, compared to the hedge fund’s paltry 36%. If the bet symbolised a clash of two distinct investment philosophies – active versus passive – passive won. Easily.

But despite the unambiguous superiority of passive investing, many still believe that they can beat the market. And by encouraging short term trading, as opposed to long term investing, brokerage apps encourage them in this belief.

The Value of Friction

There is therefore an argument that by removing the friction from trading, investment apps are actually undermining the wealth creation of their users.

Perverse as it may sound, then, brokerage apps would do well to reintroduce an element of friction into their user experience, both from an ethical standpoint and a financial one.

This could range from a holding screen prior to completing a trade to encourage reflection, or even limiting trades to one per day/week/month. Gamification could also be employed, albeit biased towards long term wealth creation rather than the short term wins it’s used for currently. For example, users could be made to progress through the levels before they earn the right to trade more frequently.

Undoubtedly, there is a balance to be struck. Superior UX is the reason trading apps have attracted so many new investors, yet they also have a responsibility to help their users achieve their ultimate goal: making money.