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Don't Let Feds Become Investing's Sheriff of Nottingham

Investing company Robinhood and its signature smartphone app have taken off in popularity in the last several months, in part, perhaps, as a welcome distraction from quarantine ennui (despite millions of lockdown layoffs, the U.S. savings rate has skyrocketed amid continuing economic uncertainty). According to Bloomberg’s Robert Schmidt and Benjamin Bain, Robinhood has “catapulted ahead of its online brokerage rivals” and attracted more than 3 million clients in the first four months of 2020 alone.

With this increasing profile, of course, comes increasing scrutiny. Finance firms are heavily regulated as it is, and charting new territory in the industry will always cause some alarm from observers who think that the role of the federal government is to keep Americans from taking any risks the observers themselves don’t approve of. In addition to the usual technocrat paternalism about “unsophisticated” people investing their own money, the June suicide of a young Robinhood user, covered well by my colleagues John Berlau and Josh Rutzick, has added a heightened emotional component to the debate.

Much like Microsoft in a previous generation, Robinhood is now obliged to staff up with expensive regulatory compliance attorneys, lobbyists, and assorted federal affairs professionals in order to survive having anti-corporate busybodyism weaponized against them in the policymaking world. They’ve hired former SEC commissioner Dan Gallagher, current SEC Chair Jay Clayton’s former chief of staff Lucas Moskowitz, and, according to Bloomberg, four outside government relations firms. In a reasonable world, this would be a ridiculously excessive series of moves for a single firm. Unfortunately, it’s probably necessary.

Many outlets have run chin-stroking scare stories about how people who make poor investing decisions on Robinhood can lose a lot of money and mess up their financial future (just like people who invest on other platforms). In order to make these universal risks seem riskier when they involve a smartphone screen, writers love to reference that the app “blasts customers’ screens with digital confetti,” as if a momentarily amusing screen animation was capable of removing a user’s rationality and agency over his or her own money.

When The New York Times decided to run an emotionally involving story about the supposed dark side of app-enabled stock investing, finance and tech reporter Nathaniel Popper profiled user Richard Dobatse, who has made—and lost—several hundred thousand dollars trading on Robinhood since 2017. Dobatse was apparently also beguiled by the “falling confetti and emoji-filled phone notifications” and decided to jump into the deep end, first taking a $15,000 credit card cash advance and, eventually, two $30,000 home equity loans. Despite building that risky position to over $1 million at one point, his portfolio had apparently crashed by July 2020 to a value of under $7,000.

That’s a tough loss, but you don’t have to be a professor of finance or a behavioral psychologist to know that day trading on consumer debt is an extremely risky proposition for a middle class homeowner. On-screen confetti didn’t make Dobatse take out those cash advances or home equity loans, thereby putting his family’s financial future in substantial risk. Gamification didn’t force him to roll the dice, repeatedly, on what were almost certainly the riskiest kind of investments available. Robinhood’s UX also wouldn’t have stopped him from paying off those initial debts once his net worth hit seven figures (the story doesn’t tell us whether he did or not). 

People who invest money might lose some of it, and people who put their money in the highest-risk investments face a higher probability of losing it all. Putting aside the obvious counterexamples of users who have made lots of money off of high-risk positions, the biggest risk for younger investors is not saving for retirement at all. If Robinhood gets young people—who wouldn’t otherwise—to put money aside and educate themselves about how finance and markets work, it could be a game changer for the ownership society. It might even cause users to question some of the existing layers of industry regulation. Just ask all of the people who are searching  “why do I have to give Robinhood my social security number?

Disclosure: I have been a Robinhood customer since July 2020. My holdings on the platform are currently worth approximately $500.