A coworker pointed out to me last week a story in the Washington Post about an Illinois family that had sued Robinhood, the suddenly ubiquitous brokerage app, for the wrongful death of their 20-year-old son. It’s an incredibly sad story.
Alex Kearns had started trading stocks as a teenager using money from birthday gifts and a summer lifeguard job. Then when he was a freshman at the University of Nebraska — let me reiterate: a freshman — he was approved to trade much riskier options. Last June he believed he had executed a trade that had a maximum down side of $10,000, which he had assets to cover. But overnight, his Robinhood account showed a balance of negative $730,000, and he received a demand for immediate payment of $178,000.
Kearns’ frantic emails to Robinhood were met with automatically generated responses that did nothing to alleviate his fears. Within hours he had ended his own life, even though — as he wrote in a suicide note — “I did not want to die.”
The next day, Robinhood sent another email to their now deceased client. “Great news!” it said. All restrictions had been removed from his account.
Obviously, no one at Robinhood set out to send an unsophisticated barely adult investor into a dark spiral by posting interim results from incomplete transactions, which seems to have been the case. (Robinhood did deliberately mislead users about its revenue sources and paid a $65 million fine for that in December.)
And certainly Kearns’ parents never expected that their son’s laudable interest in financial markets could confuse him into literal self-destruction. As parents, we all want to equip our children with the emotional tools to deal constructively with stressful situations, but we imagine those to be the pain of a romantic breakup or rejection by a first-choice university or the frustration of an unskilled manager. Who among us would have thought that a college student could be holding in his hand inescapable proof that he accidentally owed three-quarters of a million dollars?
Robinhood told the Post that it had made changes since June, including “updates to how we display buying power, more educational materials on options, and new financial criteria and revised experience requirements for new customers seeking to trade Level 3 options.” Oh, and “live voice support” for customers involved in options trading.
All that sounds good and might have saved one promising young life. It also sounds like an admission that Robinhood has been selling a product that is confusing and potentially harmful to some customers. There’s a reason that federal and state regulators have long recognized “accredited” investors who can (theoretically) afford to take bigger risks.
But limiting participation in the financial sector to those who already have plenty of money is exactly the sort of self-perpetuating elitism that Redditors used to rationalize ganging up on hedge funds that dared to short-sell GameStop shares. (I opined on that phenomenon last week. Short version: I disapprove of market manipulation, even if the primary goal is to make rich hedge fund managers cry, because small, unsophisticated investors also get hurt.) Making the rewards of investing available to more people is why the Securities & Exchange Commission just last August updated its definition of accredited investors to recognize professional knowledge and experience, not just net worth.
Still, what lured Alex Kearns to his doom may have been less what Robinhood did accidentally by making him believe that he owed a small fortune and more what Robinhood did deliberately. It’s called “gamification,” and James Chen described it in Investopedia as “turning stock trading into an addictive game.”
“Bringing young investors into the market earlier is a positive thing,” Chen wrote in December, “but it has to be done right. Young investors benefit from a long investment horizon over which to learn and hopefully profit, but they need knowledge as much or more than they need a streamlined trading experience.”
When the SEC expanded its definition of an accredited investor, it did not adjust the net worth threshold, which has been made less stringent by four decades of unadjusted inflation. Since only private investments are restricted to accredited investors, critics worry less about inexperienced young investors using gamified trading apps than they do about retirees who reached the net worth threshold through a lifetime of sacrificial savings. Just when they are most dependent on that carefully curated nest egg, they could be eligible to make high-risk private investments.