Cass Sunstein, author of the classic behavioral economics book “Nudge,” has a new book, “Sludge,” and it seems fitting to mark the occasion with a discussion of dark patterns and sludge in the financial world. Dark patterns and sludge are common in video games and marketing and can also be found in the design of some financial products and services.
A dark pattern is a user interface or product design that is engineered to force users to do something they would otherwise prefer not to do. Four packs of yogurt when there are 5 school days a week push parents to buy more than they want. Pop-up ads that hide a small “close” button in a corner and make the website link look like an exit button are frustratingly common. In video games, “grinding” makes a player invest hours into building their character’s abilities before real gameplay is possible. Hours of in-game play is addictive and can contribute to addiction.
Dark patterns and gamification
A Princeton University study analyzed online stores and found more than 1,800 instances of dark patterns, representing 15 different types. In financial products, dark patterns can take the form of exorbitant interest rates, expensive surrender clauses or hidden fees. Obvious offenders are payday loans and predatory-to-own schemes, but there are many other forms that dark patterns can take. Misguidance, hidden pricing, misinformation or deliberate obfuscation and hidden costs are all common dark patterns.
Today, any adult with a bank account can set up an investment portfolio, making it the most level playing field ever. While access and affordability are welcome developments, easier to invest means easier to lose and the standard for regulation is “buyer beware”.
In fintech, dark patterns can make highly risky, complex investments seem like a game. Financial technology firms compete for market share through increasingly engaging design and gamification. These user interfaces are often carefully designed (with the help of behavioral scientists like myself) to make them as easy and fun to use as possible. That may sound like a positive development, but consumers need to be on the lookout for the more nefarious elements of product design.
Identifying dark patterns in financial products and technology can sometimes be difficult, because whether something is a “feature” or a “dark pattern” can depend on the user’s knowledge and needs. For example, an investor with advanced knowledge may find the ability to short stocks a very useful tool. A novice investor can make expensive mistakes due to lack of knowledge. The ability that some applications provide to trade on margin makes investing even more risky, and there are no minimum knowledge or experience requirements.
Keep both eyes open
As research into dark patterns continues, we will no doubt see more and more tools to recognize them and easily flag problematic products and services. One day we will be able to get AI to scan the terms of a product or service and report dark patterns in milliseconds. This is not possible today.
For now, investors need to educate themselves on how both financial and technology products are constructed and scrutinize the marketplace for products that are transparent and mud-free. You wouldn’t sit down at the blackjack table with borrowed money and no knowledge of the game. Don’t do that with your investments either.