Last year, I wrote about the index fund investing strategy I would recommend to anybody. But I must admit that arriving to such a strategy is not a natural step for most people. It is hard to be a so-called influencer for index funds, precisely because index funds are boring, straight-forward, and don’t have the backing to advertise themselves on TikTok or Times Square. They exist in contrast to the majority of glitzy trading apps that tend to attract young and inexperienced investors.
Overwhelming research shows that the average investor cannot pick stocks, cannot learn from their mistakes, and cannot earn their money back once its lost.1 And yet, there are no shortage of terrible apps that let you trade stocks and crypto from the comfortable cliff ledge of your smartphone. Not every app sucks, but most of these new wave trading apps build their user interface and features for the sole purpose of encouraging their customers to trade as frequently as possible. While the company behind the app earns a little bit of money from payment for order flow (PFOF) on each and every trade, the average user will tend to lose money as they trade more and more.2
These apps induce some of the worst behaviorial mistakes of investing by employing so many dark patterns. Generally speaking, an app that advertises itself for new, young investors is really meant for new, reckless traders. So what can we learn from all of this?
Don’t get distracted by a polished UI. A hyper-gamified user interface that places heavy emphasis on real-time gains and losses is great for increasing customer retention, but drives people towards obsessing about their portfolios to an unhealthy extent.
Don’t get distracted by free trades. Commission-free trading should ostensibly help customers save money, but instead makes it psychologically easier to dart in and out of positions recklessly. Use this feature responsibly. Don’t think a trading app is trying to be generous by granting you free trades for your stocks or options. After all, casinos offer free drinks and appetizers to players on the slot machine, too.
Don’t get distracted by fake financial prophets. The company research articles listed under each stock are practically useless since any noteworthy corporate events are literally priced into a stock by the time they are published to a mainstream news publication. They also tend to be very click-baity and read as if they were written by some stupid robot. Reading those articles for their financial advices is like getting medical advice from supermarket checkout line tabloids.
It is sadly easy to fool people into thinking they can learn how to trade stocks. People tend to mistake their gains, if any, as evidence of their superior sense of market timing or unique industry knowledge. But this hubris is not attributable to skill, but rather to sheer luck that the past decade was simply a bull run. And lots of people still somehow lost money despite living in a rising market.
Let me cherrypick the one app in particular that pretty much kickstarted this all: Robinhood. It advertises itself as democratizing finance, but Robinhood instead dramatizes finance by fooling the public into thinking they can become consistently successful traders. Seeing designers get excited over Robinhood’s user interface is a modern-day equivalent of 1960s designers fawning over Marlboro’s TV commerciais.
I would go so far as to say that Robinhood has probably destroyed more of its users’ wealth than it has created. Which is ironic given its name.
The original version of this article was posted on March 5, 2023. I revised it significantly on April 13, 2023.