My colleague Joshua Rutzick, research associate at the Competitive Enterprise Institute, contributed significantly to the research and writing of this post.
The recent death of Alexander Kearns, the 20-year-old day trader who took his own life, has sparked a conversation about the business practices of an increasingly important sector of both tech and finance.
Kearns had begun trading while stuck at home due to the Covid-19 lockdown, as have many other young men. Robinhood, with its zero-fee model and Millennial and Zoomer-friendly platform, has seen a dramatic increase in users and activity and counted Kearns among its customers. On June 12, Kearns reportedly committed suicide after seeing a negative cash balance of over $730,000 in his account, perhaps believing that by ending his life he would prevent the financial burden from being passed on to his family. However, according to press accounts, it appears that that Kearns was not as deep in debt as he believed, and the negative balance was displayed as the total value of a multi-leg options trade of which Kearns only had a small part.
Robinhood has not released the specifics of Kearns’ trading data, spokesman Dan Mahoney said, out out privacy and confidentialy concerns. Mahoney referred us to a blog post by Vlad Tenev & Baiju Bhatt, Robinhood’s co-founders and co-CEOs, expressing sympathy for the family and announcing changes to user interfaces and educational resources to improve clarity for options traders.
The causes for suicide are layered and complex. While research has shown that perceived financial threats can severely impact mental health, mental health professionals also warn of increased risk of suicide as a result of prolonged isolation brought about by Covid-19 related “social distancing” restrictions. There are also, according to the Centers for Disease Control, a variety of mental health factors specific to an individual that may contribute to such an action.
This also isn’t the first time that a popular new product or service has been initially linked to a young person’s suicide. In the 1980s, there was a significant movement against Dungeons & Dragons, the well-known role-playing game, because some believed it was the cause of players’ suicides. However, this hypothesis was disputed at the time and later wholly disproven. D&D players who committed suicide had significant underlying mental health issues that critics of the game overlooked or ignored. While Kearns’ decision to take his own life may have been triggered by his activity on Robinhood, it would be unfair to call Robinhood the cause of his death, just as it was wrong to blame Dungeons & Dragons solely for the suicides in the 1980s.
This incident has resulted in criticism of Robinhood’s user interface and business practices, and Robinhood has begun making changes to the way it displays cash balance and buying power, as well as considering tightening the process for customers to be approved for complex options trading. There has also been more general criticism of Robinhood and other fintech investing apps, stemming from the practice of designing supposedly psychologically addictive platforms.
Scott Galloway, a professor of marketing at New York University’s Stern School of Business, writes that platforms like Robinhood “disregard the well-being of our youth for personal enrichment.” He declares that, “We may have a new menace preying on young men: online trading platforms… The market is not a reflection of the economy or progress, but increasingly of the ability of a few firms to arbitrage the gap between the pace of technology and regulation.”
Yet as tragic as Kearns’ death is, actions to sharply restrict new investing products would only inflict further harm on members of his generation, curtailing their ability to invest in and benefit from financial markets. Investing is the most effective way to build wealth and develop financial literacy. Learning how to properly manage money and save for the future is a critical life skill and should be encouraged from a young age. And fintech investing platforms can play a crucial role in helping young and not-so-young investors build these important skills.
Even when done with the best motivations, creating restrictions on retail investing will limit market access for retail investors, cutting them off from a key source of wealth. Excessively regulating online trading platforms in order to limit the trading activities open to retail investors would only serve to widen the gap between rich and middle-class. While advanced options trading and other complex derivatives/trading strategies may come with higher risk, they also can generate significantly higher returns. Preventing average investors from fully participating in the markets would put them at a greater disadvantage relative to institutional investors, who already benefit from greater knowledge, experience, and resources.
Policymakers should not exploit this tragedy by curtailing the trading activity of middle-class and young adult investors. Robinhood should, as it has already begun to do, expand the educational material it provides and encourage investors to develop a thorough understanding of the markets. But the Securities and Exchange Commission should not regulate retail investors out of the options markets nor prevent small investors from having access to leverage. This would set a dangerous precedent of preventing investors from entering into high-risk, high-reward investments. Doing so would limit the ability of young and middle-class investors to build wealth, and could also serve to push them into riskier investments opportunities, or into straight-up gambling.
Such actions would also be hypocritical and discount the innovations that young investors have historically brought and continue to bring to the financial world. Major investment banks and money managers hire freshly minted 22-year-old college graduates as analysts assisting in some of the most complex trading in the world. Tenev and Bhatt were only 28 years old when they founded Robinhood. Carl Icahn started his career on Wall Street at 25. Warren Buffett bought his first shares of stock before he was old enough to drive. If the government had prevented these individuals from having full access to the financial sector, there would certainly be much less wealth and innovation in existence today.
Let’s honor the memory of Alexander Kearns by focusing on policies to improve mental health rather than scapegoating beneficial products and services.
John Berlau is senior fellow at the Competitive Enterprise Institute and author of the new book George Washington, Entrepreneur: How Our Founding Father’s Private Business Pursuits Changed America and the World