On 'Confetti Regulation''”: The Wrong Way to Regulate Gamified Investing

Abstract

Zero-commission investing apps like Robinhood have a business model that requires clients to trade as much as possible. To that end, these apps incorporate design features sometimes called “gamification”: behavioral prompts and flashy casino-like design elements that encourage trading. Securities regulators have focused on elements that encourage repeat engagement and trading. In principle there are many ways both to define the problem and to address it through policy. In this Essay, we focus on one approach to the problem—direct regulation of software design—and warn securities regulators away from it. Regulators might find it tempting to ban objectionable design features like a burst of confetti after the successful execution of a trade, or what we call “confetti regulation.” There are two problems with “confetti regulation.” It may be hard to implement and justify. But to our mind the greater problem is that it would attract a lot of deregulatory energy from technology attorneys who cast informational molehills as free-speech mountains. Securities regulation is largely about information and communication—yet it has somehow avoided serious First Amendment scrutiny (read: judicial interference) for decades. The SEC, meanwhile, has lost many important appeals before the Supreme Court. And in light of recent changes to First Amendment law, in our view it would be unwise for the agency to pursue regulatory strategies that would precipitate more deregulatory constitutional challenges. We argue that in addressing gamification regulators should avoid asserting direct control over “bad” software design, and instead focus on the business model that drives it. In addition, regulators should justify regulatory action in terms of settled policies that are technology-neutral. Our essay discusses these implications and tees up for future preliminary components of a framework for assessing behavioral design against the securities laws’ goals.