While humans are very good at solving intellectual problems, we are very bad at dealing with issues that require us to trade off short-term pain for long-term gain: we eat too much; we exercise too infrequently; we save too little. When we do save, we tend to make emotionally based decisions that leave us with portfolios that bear no rational relationship to our genuine economic needs. The consequences are dramatic: median net wealth in the USA is only $44,900 and even in Germany, a country with a reputation for thrift, median net wealth is €60,000. Needless to say, people below the median level of net wealth are unable to deal with extended periods of unemployment and are likely facing relative poverty in old age, dependent on state support. The situation is even worse for millennials. This generation is the first since the 19th century to earn less in real terms than their parents, and face the prospect of being taxed to support the retirement of much richer baby boomers while dealing with the highest levels of economic disruption since World War II. The long-term demographic trends in the West make it unlikely that any Western state will be able to finance welfare payments at current levels throughout the working lifetimes and retirement of the millennials; their only chance for sustainable economic well-being is an active, intelligent engagement with the financial markets.

This ought to be an interesting problem for FinTechs to address; the sums involved are enormous and the societal benefits are obvious – here is a chance for FinTechs to demonstrate that they can actually be a force for good in society. Yet what do we see: apps for splitting bills (Splitwise, Billr); apps that use the Tinder model to trivialize stock trading (Robinhood); and apps like Nutmeg and Wealthfront that purport to supply investing advice, if you already have some money, but leave many clients with portfolios poorly aligned to their actual financial needs. How might FinTechs address the genuine problem and assist millennials to manage their financial affairs in a sustainable manner? It is clear that what might have worked for previous generations will not fly with millennials, they will not blindly follow advice from authority figures and they will expect any solution to be easy and ideally fun. Here the FinTech community can usefully learn from other sectors that have faced similar problems. A good example is the health insurance sector: firms like Vitality in the UK, which clearly have an interest in keeping their clients healthy, encourage their clients to exercise by using trackers like Fitbit and rewarding clients with free Starbucks coffee and movie tickets if they hit weekly targets. Vitality also offers discounted gym membership and cashback rewards for frequent gym visits.

The essence of all these ideas is that of gamification: beneficial long-term behaviour is rewarded with small short-term rewards that are viewed as fun. All of Vitality’s customers can afford to buy their own coffee at Starbucks, but the sense of having “won” something gives the reward a psychological worth out of all proportion to its economic value. There are anecdotal reports of Vitality customers running around the block at the end of a long working week to hit their targets.

In a completely different area, the Duolingo app encourages users to practise foreign language skills on a daily basis by awarding game points (“Lingots”) that can only be used for in-app purchases. Yet this essentially meaningless reward is enough to keep many users conscientiously honing their language skills. Even when we realize how the app or the company is manipulating our behaviour we play along, our competitive impulses are strong enough that the drive to win even meaningless game points overcomes our laziness and inertia when our own genuine long-term interest would not. Mihaly Csikszentmihalyi described this behavioural pattern in his psychological concept of flow,¹ a state we enter when the challenge and our own skill set are matched and we enter “the zone”.

Gamification and Financial Management

What is “gamification”? Gamification can be seen as an effective tool for influence in order to drive certain actions.² On the one hand, it provides “gamers” with points and achievements to motivate their behaviours (“game mechanics”). On the other hand, it governs how and when these rewards are unlocked over time, as well as the precise reward schedule.

Daniel H. Pink, author of best-selling books and chief speechwriter for former US Vice President Al Gore, described in one of his most popular books³ the building blocks of motivation which serve as one of the core principles of gamification:

• Autonomy – controlling one’s own pace and path through the game.
• Mastery – getting better over time through practicing and applied learning.
• Purpose – aiming at a well-defined goal.

These characteristics are also those identified by Csikszentmihalyi as likely to lead to flow experiences. There is now a significant research effort directed at how to predict and manipulate the gamer’s decision processes in order to direct them to goals external to the game. So, how do we begin to apply gamification ideas to finance? There are two apparently contradictory ideas that need to be addressed. Gamification tends to work best when it is applied to one simple, small aspect of behaviour (e.g. persuading the health insurance client to go for a walk rather than sitting down with a beer; or nudging the language learner to practise Polish verbs rather than watching the next episode of Game of Thrones). Yet, if financial advice is to be genuinely useful, it needs to be based on the user’s complete financial picture; for example, encouraging people to invest more is generally good, but not if they are carrying large levels of credit card debt.

The solution is to create incentives for individuals to upload their complete personal balance sheet. Normally this would be a tedious exercise that would take up to an hour, if not longer, and cause many potential clients to give up. To be successful this onboarding process has to be itself turned into a game, with users rewarded for completing sections and encouraged to drop the process and return later using any device. The idea is that people will go through fairly complicated setup processes to play games like Minecraft or World of Warcraft because they are confident that the game that follows will justify the time investment and because it is a process that can easily be interrupted and restarted. We have to make the onboarding process for any financial app as painless as that for a gaming app.

A simple example of how a gamification approach can be useful during the onboarding process is to look at the standard assessment of risk tolerance used by almost all robo-advisor wealth managers. This consists of asking people hypothetical questions such as: “Would you prefer a certain return of 6% or a return with a 50% chance of 14% and a 50% chance of 0%?” The response of most people to this question is generally bafflement if they have had limited exposure to finance; or they see what the question is getting at and game the answer. Instead of asking hypothetical questions – which most people do badly at answering – we can use a game-like environment to see what people actually do when faced with risk within the game. Behaviour is a much more accurate guide to preferences than the answers to hypothetical questions.

Once the user’s complete financial picture is uploaded, the site can analyse the situation and start nudging the user to make minor modifications – successful modifications in the financial picture lead to rewards. The specific change that is suggested is determined both by the user’s individual position and also by his or her goals, which have been determined during the onboarding process. As the situation changes, the particular challenge presented to the user is changed to reflect the new situation, in a similar way that players move through levels in games.

The user can set up a group of friends and family which will support both cooperation and competition, just as in a classic MMORPG.⁴ We can build in simulated shocks that will let users stress their own and their friends’ financial situation, which can be done both for fun within the game context but also supplies useful risk management insight.

Conclusion

We believe that gamification can effectively both support the targeting of specific desired customer segments as well as providing the motivation to make financial management approachable and fun for rookies.

If people will spend time running a virtual farm, we should be able to encourage them to play a similar game where in actuality they are managing their own financial situation.