Robinhood Is Easy to Use; Does That Make It More Risky?

Summary

WSJ Your Money Briefing – Episode Summary

Episode Title: Robinhood Is Easy to Use; Does That Make It More Risky?
Date: August 21, 2020
Host: Charlie Turner
Guest: Mike Wursthorn, WSJ Markets Reporter

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Overview of the Episode

This episode delves into how new trading apps like Robinhood have revolutionized the experience of investing for retail investors by making trading easier, more intuitive, and commission-free. The conversation examines not only the positives—like accessibility and democratization of finance—but also scrutinizes the potential hazards, including behavioral nudges that may encourage risky or excessive trading behavior, especially among inexperienced users.

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Key Discussion Points and Insights

1. The Ease and Appeal of Modern Trading Apps (01:17–05:04)

• Robinhood’s Innovations: Mike Wursthorn explains how Robinhood led the industry by eliminating trading commissions and popularizing mobile-first investing, which made trading mainstream and accessible from the smartphone.

  “Robinhood made trading from a phone possible, easy and mainstream, really.” (Mike Wursthorn, 01:32)

• User Experience:
  • The interface is colorful, with vivid red and green signals for stock movements.
  • Users receive notifications and alerts about significant fluctuations.
  • The onboarding process typically starts with a referral leading to a free stock, offering a low-stakes introduction to investing.
  • Completing a trade is as simple as a swipe up, followed by celebratory confetti animation.

  “A simple swipe up and your trade’s executed. You’ll see a little bit of confetti shoot across the screen celebrating the milestone, and the user starts their journey as an investor.” (Mike Wursthorn, 03:41)

2. User Controls and ‘Dark Patterns’ (03:45–04:59)

• Cancelling Trades:
  • Unlike traditional platforms, canceling a trade in Robinhood is less straightforward. Options are less clearly labeled, possibly steering users toward completing trades rather than reconsidering.

  “There are options put in front of the user that guides them toward a path that’s good for the company, but maybe not so good for the user in every instance.” (Mike Wursthorn, 03:54)

  • Apps like Schwab clearly label choices, including an explicit cancel button, giving users more agency and clarity.

3. What Users Love About Robinhood (05:04–05:51)

• Accessibility and Simplicity:
  • Many users are enthusiastic, appreciating how Robinhood removes barriers to entry and demystifies trading.

  “Robinhood made trading easy to understand for them… it opened up a whole world to them that they otherwise maybe would have never really had access to before this.” (Mike Wursthorn, 05:10)

4. Controversies and Criticisms (05:55–07:32)

• Payment for Order Flow:
  • Robinhood’s commission-free trades are supported by payment for order flow—a model where market makers pay Robinhood to execute client trades.

  “Robinhood made about $270 million just in the first half of this year off of that payment for order flow commission.” (Mike Wursthorn, 06:30)

• Behavioral Nudging Risks:
  • Features like confetti, “free stock” offers, and the frictionless interface can subtly encourage frequent trading.
  • Behavioral experts warn these ‘nudges’ may nudge users into habits that lead to greater risk and potential long-term losses.

5. Insights from a Neuropsychologist (07:32–08:47)

• Positive Aspects:
  • Simple, uncluttered interfaces can make investing less intimidating for beginners.
• Negative Aspects:
  • Too much simplicity—combined with ‘fun’ elements—may encourage overtrading, which research shows is linked to worse financial outcomes.

  “If traders are just trading because it’s fun, it’s a neat experience and it’s easy to do. There’s a lot of research that has shown… the more frequently a person trades, the more likely they’re going to lose money in the longer term.” (Mike Wursthorn, citing expert view, 08:00)

6. Robinhood’s Response (08:47–09:53)

• Company Position:
  • Robinhood frames itself as a self-directed brokerage, making no recommendations and simply presenting options.
• Gamification vs. Accessibility:
  • The company distinguishes between making trading fun and accessible through technology and intentionally ‘gamifying’ risky behavior.

  “They really do feel that it’s worth celebrating the fact that somebody deposited money to make their first trade and then follow through and made that trade.” (Mike Wursthorn, 09:20)

  • Robinhood sees these features as part of its mission to democratize investing for anyone over 18.

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Notable Quotes & Memorable Moments

• On the downsides of fun, easy trading:

  “There’s a lot of research that has shown for decades now that the more frequently a person trades, the more likely they’re going to lose money in the longer term.” (Mike Wursthorn, 08:00)

• On Robinhood’s mission:

  “When you hear the executives talk… they’ve always spoken about their mission of democratizing investing.” (Mike Wursthorn, 05:12)

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Important Timestamps

• 01:32 – How Robinhood transformed mobile investing
• 03:41 – User onboarding and the trading experience
• 03:54 – Behavioral nudges and ‘dark patterns’
• 06:30 – Robinhood’s business model and payment for order flow
• 08:00 – Discussing research on trading frequency and financial outcomes
• 09:20 – Robinhood’s defense of its interface and mission

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Conclusion

This episode offers a nuanced look at the double-edged sword of technological innovation in personal investing. Robinhood’s approach opens markets to more people and simplifies the process, yet its design and incentives may unwittingly encourage risky choices—especially among newcomers. The episode leaves listeners with a greater understanding of how design, psychology, and finance intersect on these new platforms, arming them with knowledge for more mindful participation in today’s markets.

Transcript

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] Washingtonwise.

[B]

Here's your money briefing for Friday, August 21st. I'm Charlie Turner for the Wall Street Journal. Online trading has never been easier, thanks to a new generation of trading apps. But what are the risks, especially for inexperienced traders, if traders are just trading

[C]

because it's fun, it's a neat experience, and it's easy to do. There's a lot of research that has shown for decades now that the more frequently a person trades, the more likely they're going to lose money in the longer term.

[B]

We'll talk with our reporter Mike Wurstn. All about it. And after the break, Some new stock trading apps like Robinhood are making it easier than ever for people to trade, but it's exactly because they're so easy to use that some observers are worried. Our reporter Mike Wurstn has been looking at some of these apps and he's with us now. Mike, thanks for joining us.

[C]

Thanks for having me.

[B]

So, Mike, a few weeks ago you were on the show and we talked about the rise of day trading during the pandemic and, and since then, you've been looking into some other reasons these trading apps like Robinhood are attracting users. What are these apps doing that traditional trading platforms aren't?

[C]

So really Robinhood led the charge in this, but it made trading free. Before Robinhood came along, people were spending, you know, at some points, you know, as much as 10, 20, $30 a trade on commissions. And that just kept getting knocked down once Robinhood came onto the scene with the other thing that they really also did, too is just made trading from a smartphone hugely popular. Before that, people were obviously still using computers. They were relying on just other big infrastructure if they wanted to make trades. Robinhood made trading from a phone possible, easy and mainstream, really.

[B]

Tell us more about how Robinhood works. What's the typical experience like if, say, I execute a stock trade on an

[C]

app like Robinhood Trading, the interface for trading is very colorful. You see bright red or bright green for the stock tickers, depending on whether those shares are up or down. You're getting notifications, you're getting alerts, depending on if the moves are big enough in the app as well, you know. So typically people's first experience with the app is they get a referral from a friend of theirs and usually that Referral will then lead them through the signup process and they'll get a free share of a stock from Robinhood in this case. But some of the other ones, like, we will do the same thing. You know what that does, though? It's basically a free trial for users. So they have their first taste of stock ownership, their first taste of investing experience through what seems to be a pretty harmless toe in the water. So one person I spoke with, she got a free share of Macy's. She sold it soon after, but that was one of her first trades. It really gave her some experience to understand how this works. And really, when you're trading on the app, it's a pretty seamless function. So you go from, from starting the account, getting the free share to putting a deposit in to making that first trade. It's all glided through very easily. And to execute, you just swipe up on the screen. A simple swipe up and your trade's executed. You'll see a little bit of confetti shoot across the screen celebrating the milestone, and the user starts their journey as an investor.

[B]

But what if a user changes his or her mind? How does canceling a trade work?

[C]

That's where some of the behavioral experts that we spoke with, especially people that specialize in computer to human interaction, clarified that that's what seems to be a dark pattern. And what that basically means is that there are options put in front of the user that guides them toward a path that's good for the company, but maybe not so good for the user in every instance. In Robinhood's case, and this is also mostly true on webull as well, which is another popular trading app that came after Robinhood, A user, they'll go to confirm the trade. You'll see a swipe up, or you'll see an edited link. You hit that edit link, and then you have a small X that you can hit to cancel the trade. Now, that differs from what you see on, say, Schwab's trading app, which is a lot more bulky, a lot more stodgy, you know, more traditional in a lot of various ways. But one of them is that, you know, when you go to confirm a trade, you see three very clear buttons. One of them is to proceed with the trade, one of them is to cancel the trade, and one of them is to execute the trade. They're all labeled, and it gives the user just a little more clarity in what their options are before they proceed.

[B]

You've talked to some people who trade through Robinhood. What do they say? They like, about the platform.

[C]

Between this story and some of the other ones that we've done, we've spoken to dozens of Robinhood users, and a lot of them are really big fans of the app. I mean, one of the things that I think all of them can agree on is that Robinhood made trading easy to understand for them, which is really what Robinhood's goal is. I mean, when you hear the executives talk on television interviews or even with us in of the interviews we've done over the years, they've always spoken about their mission of democratizing investing. And that's where they really seem to connect with users in the sense that before Robinhood, they may have had no idea how to trade, no idea, you know, what a stock even meant, but Robinhood made that very simple, easy to understand, and it opened up a whole world to them that they otherwise maybe would have never really had access to before this.

[B]

Yeah, but there's also been criticism of Robinhood. What's the concern?

[C]

So there's a few different concerns. One of them is that Robinhood obviously doesn't trade any commissions, and that's been really revolutionary in the industry. But the company still makes money on every trade, and that's a conflict of interest. Some securities experts have told us over the years the practice is known as payment for order flow. So basically, whenever anybody enters a trade on Robinhood, that order is then routed through various market makers. And those market makers, they have to. There's certain rules that make sure that customers are getting as close to the best price as possible. But there's a benefit, there's a revenue stream that comes into Robinhood from that. Just as an example, Robinhood made about $270 million just in the first half of this year off of that payment for order flow commission. Free trading does pay off in some aspects. The other criticism, I would say, is just these nudges that I was explaining earlier in terms of the dark pattern with traders proceed with confirming an order. The idea of a free stock, you know, the confetti animation, too, as well, where it's celebrating a milestone. These are all slight nudges that might seem like they. They're. They're just all minor on the. At first glance. But really, when you talk to some of these behavioral experts, they explain that. That, you know, done as. As effectively as it is through Robinhood, these could lead people to trade more often, which tends to lead to bigger losses over time for traders and also to risks that maybe they otherwise wouldn't have taken before, because trading on Robinhood, you know, is also fun. A lot of users say you spoke

[B]

with a neuropsychologist about how apps like Robinhood influence trading behavior. What did he have to say about it?

[C]

The main positive for sure is that Robinhood is a very simple interface. And when you go on apps like Schwab or E Trade, for example, you see a lot, there's a lot of information being thrown at you, there's a lot of clutter and it can be very overwhelming for an investor, especially a first time investor. So having this simple interface, having something that it's easy for a user to jump into and start trading and to get familiar with what's, what they, what they can do with the power of investing in stocks and other types of securities, that's all, you know, very much a positive that some of these experts did discuss. But where the, where the downsides come along is, is that if traders are just trading because it's fun, it's a, it's a neat experience and it's easy to do. There's a lot of research that has shown for, for, for decades now that the more frequently a person trades, the more likely they're going to lose money in the longer term. Really the old adages that Warren Buffett and others routinely say in terms of buying and holding securities, the research really does show that that is a sure bet way to make money through long term investing.

[B]

And what does Robinhood say about all this?

[C]

Robinhood says that it's a self directed brokerage. So what that basically means is that they're not making any recommendations on what user should be buying or selling. They're just laying out all the options in front of them and that users ultimately make their own decisions. They also made clear to us through several different conversations that from their perspective that there are differences between gamifying an app and trying to use the latest cutting edge technology to make trading more accessible. So on points like say the confetti for example, you know, they really do feel that it's worth celebrating the fact that somebody deposited money to make their first trade and then follow through and made that trade. So they feel like that they want to be part, they want to be part of the investor's experience as they grow into the market, as they celebrate, you know, these various achievements as they go. So you know, for Robinhood, they look at it all as, is that they're moving closer to fulfilling their mission of making sure that anybody who's over the age of 18 can invest has the opportunity to do so.

[B]

Wall Street Journal markets reporter Mike Wurstt. Thanks a lot, Mike.

[C]

Thank you.

[B]

And that's your money briefing. I'm Charlie Turner for the Wall Street Journal.

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] WashingtonWise.