Robinhood is evil
So are DraftKings and FanDuel. All three apps make it way too easy to become gambling addicts.
A few months ago, I encouraged Missourians to vote against Amendment 2 on the basis that online sports gambling is dangerous.
The pro-gambling funders—namely DraftKings and FanDuel—spent $34 million more1 than the opposition, and the amendment passed with a 0.1% margin.
Nonetheless, mobile sports gambling remains a huge problem. So last week, when Robinhood said that it would allow sports gambling through its app, that piqued my interest.2
Platforms like Robinhood3 are making investing more like gambling, peddling what amount to get-rich-quick schemes. People are saving less and becoming gambling addicts. And by turning all of it into a game, people are ruining their lives.
A reminder: mobile sports gambling is very bad
A majority of states have legalized mobile sports gambling since a Supreme Court ruling in 2018 gave them the right to do so.
When states legalize online sports gambling, per-person gambling spend increases by more than 6×. But even beyond that, what we’re seeing in those states is consistently frightening:
Gambling addiction is up, potentially by as much as 30%. Gambling addiction—and frighteningly, this is not an exaggeration—engages the brain in much the same way that a heroin addiction does.4
Credit scores are down and bankruptcy filings are way up.5 This is especially true among men and among younger people—many of whom aren’t old enough to legally gamble, but are old enough to gamble away their student loan money.6
Mobile sports gambling leads to higher rates of domestic violence and higher rates of suicide.
Basically no one is making money on these apps. According to an extensive study that included more than 700,000 people, “fewer than 5% withdrew more from their betting apps than they deposited.”
DraftKings and FanDuel know all of this, of course. And I have no hesitation calling both companies evil, in terms of the willfully negative impact they have on society.7
The blurry line between mobile sports gambling and Robinhood “investing”
Here’s where Robinhood comes in. They’re not just trying to get into sports gambling. Robinhood is masquerading gambling as investing, encouraging its customers to take outlandish, irresponsibly high-risk bets on its platform. I can’t sum it up any better than The Wall Street Journal:
To a remarkable degree, everything Robinhood does mimics some of the worst behaviors of online sports gambling.
How Robinhood plays into addictive behaviors and gambling
Robinhood users are disproportionately young and male—as we’ve established, exactly the population most susceptible to gambling addiction.
As Scott Galloway put it, “Robinhood has gamified online trading into an addiction.” They’re deploying a lot of the same tactics and tricks that get you onto the app, and keep you on the app, that social media and online gambling platforms use.8
Predictions markets—the ability to wager on certain real-world outcomes—opened on Robinhood ahead of the 2024 election. The Verge summarized this best: “Robinhood admits it’s just a gambling app.”
I’ve got my own thoughts on cryptocurrency,9 but recent studies have shown a “likely relationship between problem gambling and cryptocurrency trading.”10 It’s hardly the only place to trade crypto, but Robinhood is making an increasingly substantial portion of its revenue on crypto trading.11
Robinhood largely makes its money by taking a small percentage of every individual trade.12 This sets up misaligned incentives: trading at high volumes is not consistent with how people should be investing and saving.13
Between the Robinhood Investor Index and other indicators on the app, they strongly bias users towards “hot” stocks.14 The people buying the most popular stocks on Robinhood end up systematically losing money: -4.7% over the subsequent 20-day period, which becomes substantial when it compounds.
For most of us, investing is—and should be!—saving for retirement and/or for a rainy day fund. That generally means that we shouldn’t be making trades that involve wild day-to-day swings that risk cleaning us out entirely. But Robinhood makes that part of its core platform of offerings.
In short: everything about Robinhood reads a little bit like this fake alcohol ad from South Park, with a faux-warning at the end that rings entirely hollow.
Unlike Robin Hood, Robinhood steals from the poor
In an interview last year, Robinhood CEO Vlad Tenev talked about the company’s long-stated goal of opening up finance to everyone.
In certain respects, he’s correct that there’s a lot about investing that isn’t egalitarian: access to private markets, access to venture investing, etc. is limited.15 Democratizing investments would be good!
But Robinhood isn’t doing that because they aren’t promoting savings and investment. They’re promoting gambling. It’s no accident that addiction centers are seeing such marked increases in patients seeking help for trading.16
Sports gambling is relatively easy to regulate; regulating how people gamble on platforms like Robinhood is much harder. Do we want to wholesale ban people from options trading? No, probably not. But do we want most Americans putting their retirement savings in options? Very clearly not.17
This TikTok video shows us how easy it is to start options trading on Robinhood. (Namely, by lying about your expertise.) And that, along with a million other issues, is a real problem.
Make investing boring again
I’ve written before about how hard it is to be a young man today, and gambling platforms like Robinhood and DraftKings are making that problem much worse.18
At the same time, trust in the financial services industry is among the lowest of any industry. And a majority of Americans believe that the stock market is rigged against them,19 even though returns for decades have demonstrated that it’s part of a path to retirement for the 100s of millions of Americans with stock market exposure.
How do we solve this?
Regulation: Outlaw gamification that encourages big bets and irresponsible investments. Restrict notifications that encourage the sort of reactionary behavior that has people buying high and selling low.
Separation: Don’t allow people to invest and gamble (on sports or prediction markets) in the same account. It should not be that easy to move money from one to the other, and the two shouldn’t be treated as equivalents.
Education: Teach financial literacy in school. Explain the power of compound interest. Help people understand that what they’re seeing on Robinhood and elsewhere—something they’re exposed to at an increasingly young age—is gambling, not investing.
People will always want to get rich quick; that’s an instinct as old as time. But the more we can do to keep people from recklessly gambling—something that’s become a Robinhood forte—the better off we’ll all be.
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For context, they spent about 4.7× more—and not for nothing, ran a better campaign—than the opposition. Having Hall of Famer and former Cardinal Ozzie Smith, who remains immensely popular, appear in St. Louis ads talking about his grandchildren was a masterstroke.
The “yes” campaign had an impressive ground game too: evidently they spent a lot of time at fraternities encouraging people to vote, since that’s fertile ground for yes voters. (And, since it’s all young men, it’s fertile ground for gambling addicts—their best future customers.)
This effort got shut down almost immediately, at least for now.
Robinhood is, in fairness, not alone here. But they are the most prominent, and with a stock that’s up about 5× in the last two years, they’re clearly doing it well.
A reminder: the American Psychiatry Association has a list of “Substance-Related and Addictive Disorders” that includes a lot of the culprits you’d expect: alcohol, meth, opioids, and more. Gambling is the only addiction that isn’t directly related to substance use. Why? “Gambling disorder is similar to substance-related disorders in clinical expression, brain origin, comorbidity, physiology, and treatment.”
Bankruptcies, for context, have climbed by 28% in states where sports gambling is legal.
For further context: for every dollar people gamble on sports, they put $2 less into an investment account.
This Saturday Night Live parody (“Rock Bottom Kings”) hits the nail on the head, particularly with Shane Gillis’ impish smile when he notes that these companies take addiction seriously.
Robinhood paid a $7.5 million fine last year to resolve some of these complaints from Massachusetts. But that’s hardly even a slap on the wrist in the context of a company with a ~$50 billion market cap.
My thoughts: 15ish years on, it still makes absolutely zero sense to me.
This same study notes, “we found cryptocurrency traders share similar demographic and personality characteristics with share-traders and problem gamblers.”
This has to be studied much more, but gambling and crypto share wild volatility and a get-rich-quick sort of attitude. Culturally, there’s a certain machismo that both have. So it makes sense that there’s a lot of overlap in the universe of people who gamble and who dabble in crypto.
Allowing the $TRUMP meme coin—which, like every meme coin, explicitly has no underlying economic value—to trade on Robinhood cements that they’re not serious about investing, and that they’re really much more about gambling.
Yes, they do not charge commission. However: “Robinhood generates transaction-based revenues by routing its users' orders for options, equities, and cryptocurrencies to market makers, which is a process known as payment for order flow (PFOF)… The payment is usually only fractions of a penny per share but can be a significant source of revenue for companies dealing with a large number of orders.” (Source)
Robinhood makes even more money from options trading—something they’re increasingly encouraging its users to do. (Including in the UK, literally as of yesterday.) This is its own category, but it’s worth noting that options pricing is so complex that people have literally won Nobel Prizes for their work on the theory of options pricing. So no, the vast, vast majority of people shouldn’t be options trading.
This isn’t exactly the hot hand fallacy, nor is it exactly the gambler’s fallacy. It feels like it’s something in between the two. Nonetheless, Robinhood is preying on dangerous psychological traps.
For instance, I tend to think that the accredited investor rule is outdated and should be reformed.
The data here—“clinical director Jessica Steinmetz estimates about 10% of patients are seeking help for addictions tied to trading. Before 2020, there were no such patients”—is obviously pretty heavily anecdotal, as is other data in this WSJ article. I wasn’t able to find anything more robust or peer-reviewed, in part since it’s such a difficult thing to measure. (For the purposes of measurement, it’s not always obvious where the line exists between “investing responsibly” and “taking stupid risks as the result of addiction.”)
But lots of data seems to back up that this is clearly a problem, and I hope that there’s more robust data on this in the future.
Matt Levine from Bloomberg has written about how Robinhood and others are profiting from this kind of reckless options trading that just amounts to gambling.
Retirement savings are a huge problem for women too, as they have significantly less saved on average. This is a critical issue, but the policy solutions are much different. Why? Women are, generally, less likely to gamble it away on a random NBA prop bet or, say, Hawk Tuah Coin. (Yes, people actually did that.)
This was as of a couple years ago, at the height of the Robinhood-induced meme stock craze, though I would imagine numbers remain similar today.