It’s a serious departure from the basics that contribute to wealth creation: understanding company performance, assessing management quality, and analyzing dividends. Instead, prediction markets encourage investors to bet every part on the red.
This reflects a broader trend in parts of the industry to mix investments with more entertainment-like functions. Because I strongly consider that self-directed investors deserve platforms that serve their interests first, I believe it is time we now have an honest conversation about where we’re headed.
What is at stake
Self-directed investing has come of age. These platforms aren’t any longer the “play money” accounts that advisors of previous generations once dismissed. Accounts have increased 2.3 million in 2020 to over 11 million in 2023with total assets of over $1 trillion. Today, 45% of Canadian investors use these platforms. The success is undeniable, which is why the increasing trend that DIY investments are seeing towards gamification gives cause for pause.
This just isn’t about prediction markets as a stand-alone concept, but reasonably that they could cause harm as a part of an investment portfolio. No recent wealth is created in all-or-nothing markets. Money is solely transferred from there 71% who lose and 29% who win. And the home at all times gets its share.
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This also means platforms that use the identical psychological tactics that make people scroll social media. Most of us already understand how attention-based platforms work – should investments go in the identical direction?
Gamification maximizes engagement. Leaderboards rank you compared to other retailers. Badge in your tenth trade. Animated celebrations when buying a share. Push notifications create urgency.
In extreme cases, these characteristics encourage excessive trading, which can lead to lost returns as a result of poor timing, currency conversion costs, and tax implications.
The real risk
The risk goes beyond just platform features. Young investors today are under enormous pressure: housing seems out of reach, retirement seems abstract, and headlines concerning the displacement of AI and economic uncertainty create constant stress. In this environment, platforms that tout quick wealth through frequent trading may seem to be the one answer.
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But it’s the other of what we all know works. The tried-and-true approach is to begin early, stay consistent, and tune out the noise. It’s boring, however it’s effective.
When disruptors introduced reasonably priced pricing and higher experiences, they did the industry a favor. But for those recent or less savvy, the fusion of investing, prediction markets and social media increases risk. We could also be a market correction or two away from a generation falling even further behind.
Red flags to look at out for
So what should investors concentrate to? Of course, not all platforms are the identical. Ask yourself: Does this help me invest or strongly encourage me to trade? If your investment platform feels more like a slot machine than a financial instrument, it’s value asking what behaviors it encourages.
Understand what’s being offered. Commission-free trading sounds great, but don’t confuse this with the concept “every trading is free”. Investment platforms are complex and expensive to develop and operate. In order to cover costs and return capital to backers, these platforms need recent sources of income. In this market environment, speculative products (like crypto and options) are easier to scale and appear more exciting than traditional offerings. These products promote riskier investment practices (borrowing on margin, buying and selling more regularly) that might not be in one of the best interests of investors. Understanding how these features work and why they exist keeps you on top of things.
The next standard
Recognizing warning signs is just half the answer. Our focus needs to be on investor success, not short-term dopamine. This is not going to correct itself; It requires leadership from either side of the industry.
There is a necessity for established firms to further speed up product innovation. The same technology that could make investors overtrade may make them make smarter decisions: AI that encourages pondering reasonably than reacting, and gamification that rewards long-term pondering reasonably than quick motion.
For disruptors, this implies staying true to their original mission, when the actual aim was to make investing more accessible, to not make profits through speculation.
Real wealth comes from discipline and consistency over time. We should optimize for this.
