It's Not Just the Confetti
Bloomberg Businessweek|April 26 - May 03, 2021 (Double Issue)
How Robinhood made stock trading easy, approachable— and maybe too hard to resist
Misyrlena Egkolfopoulou, Annie Massa, and Anders Melin

In Silicon Valley, Nir Eyal is the habits guy. Want to understand how to get app users to come back again and again? Then Eyal is your man. A former lecturer at Stanford’s Graduate School of Business and an angel investor, he’s studied how companies such as Facebook Inc. and Twitter Inc. encourage users to spend time on their platforms. He didn’t invent the techniques, some of which were also being observed and taught by others on the Stanford campus by the 2010s. The place was a hotbed of behaviorally informed design. But Eyal summed up what he saw in a PowerPoint-friendly four-step model that showed how the smartest designers were turning their products into habits. In blog posts and articles in 2012, he called it “the desire engine.”

It was around this time Eyal says he was approached in a Palo Alto coffee shop by a young techie named Baiju Bhatt with a bold plan for a no-fee stock-trading app. He wanted to show it to Eyal.

A year later, Bhatt and his business partner, Vlad Tenev, would launch their company, Robinhood. Their app popularized the zero-commission brokerage, eventually forcing its major competitors to follow, and introduced millions of millennials and Gen Zers to the market. It’s also attracted critics, including U.S. lawmakers and a state securities regulator, who say Robinhood makes investing very real money feel too much like a game and encourages frequent trading by its novice users.

Eyal can’t say whether Robinhood followed his model—he met with the nascent startup’s team a couple of times but didn’t end up working with them—but he says he can see in the app many of the successful design features he’s identified. Robinhood Markets Inc. says the app was neither influenced by Eyal nor built on the idea of making the app habit-forming. “From the very get-go we built a simple, elegantly designed platform to remove historical barriers to investing and open financial markets to millions upon millions of people previously left behind,” a spokesperson says.

Eyal says the most engaging designs work like this: A good product has triggers that pull users in. Then it needs actions—particularly simple and easy ones—that remove friction and help users accomplish what they came to the app for. Variable rewards build anticipation and leave the consumer fulfilled yet wanting more. Getting people to commit things like time, effort, or social capital, what Eyal calls “investment,” increases the likelihood they’ll return. Repeat enough times, and a feedback loop is formed. The activity becomes a habit. This needn’t be nefarious: Eyal’s 2013 book, Hooked, published more than a year after his encounter with Bhatt, discusses an app that helps people read the Bible more often.

Other experts also see the Robinhood app exerting an unusual pull. “It’s a different technology of high stimulation and high distractibility,” says Brett Steenbarger, a professor of psychiatry and behavioral sciences at SUNY Upstate Medical University in Syracuse, N.Y. “With the traditional brokers, you haven’t had that.” Although Robinhood doesn’t charge commissions, like other brokers it makes money each time its users buy or sell a stock, based on payments from financial middlemen who execute the trades and earn profits on small differences in market prices.

Other brokerages’ apps do have features similar to Robinhood’s, and stock trading on any platform can inherently blur the lines between investing, entertainment, and gambling. The question many are now asking about Robinhood, essentially, is: Is the product just a little too good at what it does?

Robinhood’s critics focus a lot on its use of animated confetti to celebrate a user’s first trade (a feature it says it recently replaced with visual animations “that cheer on customers”). But that’s not the only thing that appears to have made the app so irresistible.

If you download the app out of curiosity, Robinhood instantly begins to pull you into its world. After a less-than-five-minute sign-up process, there’s an offer to get a free single share of stock. Until recently, a digital scratch-off ticket appeared, letting you reveal which stock you won. This gives a neophyte investor something to watch—a natural reason to keep paying attention to the app. Users can get notifications of the stock’s movements.

The company says its design principles are based not on encouraging trading but on accessibility and ease of use. Only about 2% of its users are pattern day traders, it’s noted, a label including any account that carries out four or more trades in five days.

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