What Investors Should Know About Behavioral Tricks in Financial Products
The sinister side of behavioral science in product design.
“Dark patterns are design features used to deceive, steer, or manipulate users into behavior that is profitable for an entity offering a product or service, but they are often harmful to users.”—Rohit Chopra, Consumer Financial Protection Bureau
If you’re familiar with behavioral finance, you likely know about the power of a good nudge. Nudges are small changes to a choice environment that lightly prod a consumer toward behaviors that are personally or socially beneficial (such as auto-enrollment in retirement savings plans or organ donation programs). Nudges often reduce friction to make processes simpler and easier. They are the result of behavioral science being put to work in the best interest of the consumer. Cass Sunstein, the man who made “nudge” a household word with his classic behavioral science book recently brought the more nefarious side of behavioral product and service design to light in his latest book, “Sludge.”
Sludge is like an anti-nudge, introducing friction or complexity to discourage actions that may be in the best interest of the customer, but not the vendor. You’ve likely encountered sludge in the form of bureaucratic red tape, pop-up ads that hide a minuscule “close” button in a corner and make the link to the website look like an exit button instead, or subscriptions that are easy to initiate but difficult to cancel.
Sludge is part of a larger class of nefarious product and service design methods known as dark patterns. These design methods may be odious, but they are often legal and frustratingly common. Since the onus is on consumers to spot and avoid products and services with Machiavellian attributes, this article offers a brief overview of how and where you might encounter dark patterns in the world of finance.
Dark patterns are design features engineered to coerce users into doing something they would otherwise prefer not to do. A four-pack of yogurt—when there are five school days in a week—compels parents to buy more than they want. In video games, “grinding” requires a player to invest hours building a character’s abilities before real gameplay is possible. Hours in the game are habit-forming and can contribute to addiction.
In September 2022, the Federal Trade Commission reported a rise in sophisticated dark patterns designed to trick consumers into buying products and giving away their personal information. The report, entitled ”Bringing Dark Patterns to Light,”describes four major types of dark patterns to watch out for.
One Princeton University study analyzed online shopping sites 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, expensive surrender clauses, or hidden fees. Misdirection, obscured pricing, misinformation or intentional obfuscation, and hidden costs are common dark patterns.
Here are some examples in financial products.
As research into dark patterns continues, no doubt we will see more and more tools for recognizing them and flagging problematic products and services with ease. We will one day be able to have artificial intelligence scan the terms and conditions of a product or service and report dark patterns in milliseconds. This is not possible today.
For now, investors must educate themselves about how both financial and technological products are constructed and scrutinize the marketplace for products that are transparent and sludge-free. If you want to dive deeper, the links throughout this article will take you to additional resources for identifying bad actors in the marketplace so you can spot them before they target you.