The gamification of finance may encourage long-term savings habits

The gamification of finance, which blurs the line between speculating for profit and investing for the long run, has always made me nervous. But it turns out that some of the techniques used to hook players on video games can be used to help us develop healthy financial habits. Specifically, gaming elements can encourage adopting a long-term view of money, an important aspect for building wealth.

As the valuations of last year’s meme-stock darlings dive and Bitcoin anguishes at about half of its November peak, many retail investors will be feeling more than a little financially bruised by their misadventures.

Stocks such as GameStop and AMC Entertainment soared in the first half of last year, driven by individual investors spurring each other on to squeeze short sellers. The reckoning has been brutal. Both stocks are down 70% from their 2021 peaks. The Roundhill MEME exchange-traded fund, which tracks a basket of stocks with elevated social-media mentions, has lost more than a third of its value since its debut in the first week of December.

While the democratization of markets is to be applauded, there’s a risk that this year’s volatility in equities will leave the next generation scared of investing money for retirement. That’s worrying because the need to build nest eggs has never been greater. The immutable mathematics of demographics means we’re rapidly heading toward more retirees relying on fewer workers to fund state pension systems. And the incorrigible calculus of compound returns shows the desirability of starting a pension plan as early as possible.

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But a study by the University of London’s Bayes Business School suggests gamification can help us overcome our psychological biases and become better at locking away money in a retirement account.

The study asked about 300 Britons to set savings goals and track their progress in achieving those targets over four weeks. The group was split into two. Half used an app that employed gamifying techniques to incentivize savings, including league table rankings and competitions between groups of players. Half used a simpler app that just recorded the amount saved versus the target.

The report suggests that offering points that investors can accumulate by increasing their savings exploits a psychological trait known as Medium Maximisation Theory. The immediate gratification of getting a concrete and instant reward offsets the intangibility of meeting a long-term goal. Creating league tables can stimulate better savings behavior by introducing the element of competition, the study argues. Setting targets can help by giving participants a sense of what psychologists refer to as “mastery,” similar to completing the different levels in a computer game.

It worked. By the end of the four weeks, the gang that was using the gamified app had put aside almost 20% more relative to their goals compared with the vanilla app savers, the study says:

“Gamification can help consumers placate their `present’ self by allowing individuals to experience pleasurable psychological responses typical of games such as mastery, competition and escapism. These experiences make adhering to long-term goals more immediately enjoyable and therefore help consumers to achieve them.”

Faced with the prospect of delayed gratification, humans are hardwired to make bad choices. We live in the present; the future is, by definition, some way off. Saving for retirement doesn’t enter the calculation when a twenty or thirty-something is deciding whether to treat themself to smashed avocado on sourdough for breakfast or settle for beans on toast.

As more companies seek to tap the growing market for private pensions by offering digital investment platforms, maybe adding gaming elements can help nudge consumers to put aside just a bit more for retirement.