Behavioural insights into trading apps and the rise of DIY investing

Sian Jones • 8 min read

Trading apps such as Robinhood, Trading 212 and eToro have skyrocketed in popularity over the past few years. The graph below shows by just how much trading is becoming a common pastime:




The Covid-19 pandemic and the lockdowns and restrictions that have come with it have certainly contributed to this boom in independent investing by creating a situation where many are looking to earn some extra cash in times of financial hardship and one where people have a lot more time on their hands to take up a new hobby. 


The sharp rise in the number of amateur traders buying and selling shares has led to a combination of excitement that investing is being made more accessible to non-professional investors, and concern regarding the rise of “hype stock”, “meme investments” and a general increase in uninformed and emotional decision making. Whether you are supportive of this movement or not, the changes in the dynamics of the stock market are incredibly interesting from a behavioural perspective. Below are just a few of the behavioural insights that can be made regarding the rise of trading apps and what they could mean for the future of the investing world.


How to change customer behaviour to convert more self-sufficient online banking users?


When we are unsure of what to think or feel about something we often rely on our system 1 brains to help us make a choice. This means that understanding the way people think and use biases and heuristics to decipher information can help banks better present information to encourage a desired behavior. 


This knowledge can solve this pressing issue for banks, and ultimately improve the experience for customers and employees. Here are three ways that banks can utilise behavioural science to nudge customers to better take advantage and enjoy online banking.


Social Identity Theory - Underdog Investors


Traditionally, trading stocks and shares has been handled almost exclusively by hedge and mutual funds and other finance professionals, let’s call these people “in-group 1”. There were high barriers to entry into this group and many obstacles to prevent new competitors creating an “out-group 1”. However, in recent years, platforms and apps such as Robinhood, eToro and Trading 212 have opened up the trading floor to a much wider range of individuals. In particular, significantly younger demographics are getting involved. 


This shift has resulted in “in-group 2” being formed, made up of the old “out-group 1”. These individuals are building their own portfolios and are trying to ‘take on’ the traditionally all-powerful hedge funds. This David vs Goliath social identity has been extremely powerful. We are social creatures who tend to define ourselves based on our social groups -- this has been found time and again. Our social groups are so powerful to our innate human behaviour that even in experimental conditions we form close social bonds to others for trivial reasons such as the colour of our shirts.

An excellent example of this group mentality is the GameStop short squeeze of January 2021, which came as a real wake up call to the Wall Street regulars. The r/wallstreetbets reddit forum managed to create such a strong group identity of underdog investors with a shared goal of “sticking it to the man” that they managed to drive the share price of GameStop up by 1500% over two weeks. The resulting financial consequences for hedge funds and short sellers who had been relying on share price falling were, in some cases, disastrous. In many ways, herd behaviour has always been a major aspect contributing to the dynamics of the stock market, but trading apps have introduced new, competing, “herds”.


Authority Bias - Gen Z style


Authority bias playing a role in the world of trading is no new phenomenon. Authority bias describes the human tendency to attribute greater accuracy to the opinion of a figure that represents authority. Interestingly, studies have found that the advice of doctors were more closely followed when they were wearing a stethoscope (a signal of their authority) rather than when they were in plain-clothes. 


The very nature of the financial advice industry relies on people trusting relative strangers with their money due to perceived expertise. However, as new social groups enter the investment world, there are naturally new types of authority figures - most notably people with large social media followings. There is no better example than billionaire Elon Musk, who many unsurprisingly associate with financial success. When Musk tweeted “Use signal”, referring to the end-to-end encrypted messaging app, a tiny unrelated medical device company, “Signal Advance Inc.”, saw its share price rise 5100%. Musk also contributed to the GameStop share price surge, with the tweet “Gamestonk!!!”. He has had similar effects on Etsy, Bitcoin and of course, Dogecoin. 


It isn’t just billionaires who have this kind of influence; “finance influencers” are becoming more mainstream on Instagram, Youtube, and more recently, TikTok. Although not on the same scale as Musk, these Gen Z personalities are still having an impact. FinTok star Humphrey Yang has racked up 2.1M followers on his personal financial and investment advice channel, and there are hundreds more out there like him. The influence of these figures is not to be underestimated, when the meme cryptocurrency Dogecoin went viral on the video sharing platform, it soared by 40% in just two days. Authority Bias has always been present in trading, however the authorities are changing. 


Present Bias and Gambling - Get Rich Quick


There has always been a fine line between investing and gambling, and the rise of trading apps has increased the numbers on the gambling side of it. For many new and independent investors, trading stocks and shares is not done with the goal of building steady, long term portfolios, but with the aim of achieving large and fast financial gains. Many wouldn’t call this investing at all, as it is much more present focussed than what we traditionally would associate with investing. This shift could be down to many things; the younger demographic; the gamification of trading apps; increased emotional decision making, but the main consequence is that where there is gambling, there is the gambler’s fallacy. 


The gambler’s fallacy occurs in trading when the investor believes a stock will rise or fall in value in the opposite direction to a series of its recent transactions. Although this bias has always been present in the buying and selling of shares, the trading that takes place on platforms such as Robinhood is often characterised by the trading of highly volatile “get rich quick” stocks. Trading these stocks while under the influence of the gambler’s fallacy is much riskier than putting your money into an index fund. 

Optimism Bias - What could go wrong?


Optimism Bias refers to the tendency we have to overestimate the probabilities of good things happening to us in the future. We also tend to underestimate the likelihood that a negative event will occur. This miscalculation can be attributed to us overestimating our control over events. In investing, this can lead to negative outcomes as we tend to expect unpredictable market forces to turn in our favor.


Even though the stock market is opening up to a much greater variety of people, the old players and traditional finance professionals are still there. This means that millions of ordinary people are, quite literally, going up against the pros. The pros are also not just people, when one novice investor is up against a firm with high-frequency algorithmic trading technology, it isn’t exactly a level playing field. Despite this, more and more people are turning their hand at trading, even when faced with the knowledge that only 10% of professional investors consistently make money through the stock market. Obviously, as with most of these insights, optimism bias has always been affecting investment decisions. However, as the people currently entering the stock market are facing even more of an uphill battle due to them being amateurs, the power of this bias is proving to be incredibly strong. Tied to this strong optimism bias in the emerging theme of “Diamond Hands” - a term used to describe traders to hold onto and believe in the profitability of their stocks even when their value is falling. There have been a few "Diamond Hands" success stories, where the stocks in question have recovered and reached new highs, however it is rare, most traders refusing to sell falling stocks will end up losing money. It is a classic example of a high risk - high reward scenario, however many young investors following “Finfluencers” or reddit threads are likely to only see people sharing the success stories. This in turn increases their perceived probability of diamond hands successes and will feel more optimistically about acting likewise - an example of the availability heuristic at work.


In Summary


Key biases and heuristics that have always influenced trading and investment decisions have not gone anywhere with the rise of the DIY investor and trading apps, however they are evolving. New group social identities where many individuals make the same investment choices can have huge impacts on share prices, the GameStop short squeeze should come as a big enough warning to Hedge Funds of the power of Gen Z redditors when they all band together on Robinhood. The nature of authority is also changing - many new investors are now more likely to make an investment decision based on an emoji tweeted by Elon Musk than by an article in the FT. There is now a much higher proportion of people who enter the stock market blindly optimistic with the belief they can make a quick buck than ever before. Whether this encourages or concerns you, the behavioural shifts of the average investor that are already beginning to be seen could be huge. 



Money Box - The rise of trading apps on BBC Sounds

Thought Bubble: What’s behind the GameStop investment surge? Brian Benway

How GameStop Demonstrates the Phenomenon of Ideological Investing. Utpal Dholakia Ph.D.

Elon Musk’s tweets are moving markets — and some investors are worried. Sam Shead for CNBC

A Brief History of Elon Musk’s Recent Market-Moving Tweets. Dorothy Gambrell for Bloomberg Businessweek.

TikTok Is the Place To Go for Financial Advice If You’re a Young Adult. Cheryl Winokur Munk for Wall Street Journal

Gambling addiction experts see familiar aspects in Robinhood app. Cyrus Farivar for NBC News

Robinhood Turns Investing into Gambling. Thomas Wong.

Impact of Optimism Bias on Investment Decision: Evidence from Islamabad Stock Exchange, Pakistan. Naveed Iqbal Research Journal of Finance and Accounting

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