Robinhood has Major Problems. Can They be Fixed?
Robinhood’s slogan is “Investing for Everyone.” I have a revision that actually fits their business strategy: “Robinhood: Gambling for Everyone.”
The company has turned investing, a way to build wealth through the power of compound interest, into a gamified app that treats the market as a virtual casino. Users are nudged to act irrationally through the same psychological tricks social media companies implement to keep us glued to our devices. Trust me when I say this is not good for building wealth. Investing is the one industry so prone to psychological manipulation it is almost criminal the way Robinhood treats its users.
Skeptical? Think I’m exaggerating when I say the app itself screws with your psychology? Download it yourself and try it out. I bet you can’t last a month before getting the urge to buy and sell unnecessarily. I know I did.
The consequences have and will be terrible for users if Robinhood continues down this path. A kid already killed himself after being allowed to blow-up his account with absurd amounts of leverage. Who’s to say it won’t happen again?
The Robinhood Onboarding Experience
Here is what the user sees when signing-up for Robinhood:
Two clicks in and Robinhood is already comparing investing to a slot-machine. Saying there is a “1 in 250 chance” of claiming a “free” share of Apple is ingraining a gambler’s mindset, the sort-of Wall Street Bets attitude that builds destructive habits for investors.
It doesn’t get any better once you deposit money and start buying either. As you can see in the image below, when your portfolio is having a down day (an inevitability in investing), the whole app transitions to red. This may seem inconsequential, but I can tell you from personal experience it increases your stress levels and nudges you to make poor decisions.
Users making decisions is how Robinhood makes money, by selling your order flow. It is not how users make money. This isn’t a terrible tradeoff for making investing commission-free, but people still need to understand the incentive structure Robinhood has set-up for itself.
And if you thought the equity-side of the business was a little too gamified, check-out their crypto UI. It’s a full-blown arcade game, except one where users can gamble their savings away. The overlords in Ender’s Game would be so proud.
Getting Approved for Options
The most egregious choice Robinhood made was how they treat options trading. If you don’t know, options are highly complicated, risky instruments that can put you on margin very easily and make you liable for large sums of money if things don’t work out how you think. Other brokers like Schwab or TD only approve you for certain types of options and make you apply for different levels as your assets and experience increase. Robinhood has…no limits?
When I used Robinhood, I applied for options trading to check-out what they had. My account was very basic with only a few thousand dollars in it. I was shocked to find out that after clicking a simple button and waiting a few days that Robinhood “approved me” (I doubt any due diligence was actually performed) for all options trading. If you have any experience you know this is absurdly stupid. Giving a college student no restrictions on options trading is like giving a toddler a machine gun. Something bad is inevitably going to happen.
Comparing it to other Brokerages
To give some more perspective, here are some screenshots of Charles Schwab’s app. Notice how, unlike in the photos above, Schwab isn’t focused on “increasing user engagement” but on providing relevant information in a basic, almost anti-nudging manner. This is because someone like Schwab actually has their clients best interest in mind, and isn’t solely focused on profiting from them making trades.
How can it be Fixed?
I doubt Robinhood can be fixed with current management. They’re incentivized to increase user numbers at all costs because doing so in the past has made them absurdly rich (at least on paper). Unless more people cause self-harm over choices made on the app, I don’t see anything happening unless regulators step in. And since we are in the golden age of fraud, it feels unlikely that regulators will do anything meaningful.
If I was given full autonomy over Robinhood, here is what I would do to protect users and actually align the company with their stated mission:
Implement industry-standard trading limits on options
No free stock giveaways, no language that compares investing to gambling
Tone down the social media-esque psychological nudging, especially with crypto
Do I hear you complaining that this would slow user growth, and possibly hurt Robinhood’s private valuation? Please, get real. Stop with the Silicon Valley “growth hack at all costs” mindset and actually think about building a business that wins for all parties in the long-term. As Mark Baum (I know, fake guy, but still) from the Big Short says, “Hey… excuse me! Let me ask you this: What company treats its customers that shittily and succeeds?” Gamifying investing is a good way to grow users in the short-term, but it is no way to build a quality business over the long-term. Treating your customers poorly never works in the end.
I would love to hear any other suggestions for how Robinhood can better serve its users. Contact me on Twitter or email me at firstname.lastname@example.org if you have any suggestions (you can always comment below too). I’ll make sure to follow-up however you get in touch.
Disclosure: The author is not a financial advisor, and may have an interest in the companies talked about.