From the rollercoaster ride that has characterised Robinhood to last week’s surprise collapse of FTX – whose platform was considered a gold standard for crypto trading – a dim picture has been painted of the grand vision of democratised finance.
But what has become increasingly evident is that our reptile brain, despite all the technologies running our everyday lives, is playing a central role in the success of democratised finance – whether we like it or not.
The concept of democratised finance is, at its core, beautiful, and plays on the global demand to completely rethink the financial system so that it is more accessible. We live in a world that has never moved this fast before and will never be this slow again, where fake news and algorithms seem to be best friends, and where there exists the capability for a layperson to bet his or her entire household on an app in a single tap.
This reality is distinguished by three humans truths: attachment, accessibility and alarm.
Attachment
In 2016, a Federal Reserve Bank of Boston study concluded that the average value of a cash transaction was $22, compared with $112 for non-cash transactions – a 409% jump.
The research found that using physical cash subconsciously caused spenders to establish stronger and more profound relationships with their money than they did when they relied on credit cards.
Today, however, with the declining use of cash, we no longer have the same attachment to our money. The way we each see and understand our personal financial picture has been transformed, now through the lens of numbers on a screen.
Accessibility
A second aspect of this topic is even more concerning: an overabundance of accessibility. Trading has become easier and easier – the object of trade having evolved from goods, to gold, to currencies, to crypto – and so has the effort required to exchange assets.
In the past, our inherently lazy nature safeguarded us from making wildly irrational moves like gambling our houses. It was simply too large and time-consuming of an effort. Without hi-tech enablers such as the instant “in-app purchase”, enough time is allowed to pass that the dopamine rush of excitement that comes with getting something new vanishes and is replaced with the harsh reality – potential destitution.
The accessibility of trading today is broad and profound. The average American now spends 10.5 hours a day glued to a screen. A big decision like investing one’s entire fortune has become as easy as buying a pair of shoes on Amazon. That emotional barrier has vanished, disguised as the rhythm and routine of pressing “buy”, allowing us to all too easily gamble the house. Ironically, these acts have become too accessible.
Alarm
Years ago, it might have taken days for a breaking news story to spread – but now it spreads in minutes. This leads us to the third human truth. The amygdala. Think of this as from where fear emanates in our brains. A tiny spot of grey matter overruling the rational, making us run for our very survival. In the past, it may have involved a lion on the savanna; today, it is social media panic.
Nothing spreads as fast as bad news. Not only are social media and search engine algorithms optimised to elevate this news, but so are our brains. When fear appears, rationale departs, and this often results in folks making purely irrational moves. It is also what fuels the rumour mill, which increasingly puts financial players under pressure.
Revisit any historical financial crisis – panic seems to be a fixture in the recipe for disaster.
Conclusions
It may not sound like a big deal, but with these three factors – attachment, accessibility and alarm – combined, the core concept of democratised finance is at risk. Not because the idea is a bad one, but because all these seemingly frustrating barriers – which ironically once indirectly protected the consumer – now seem to be gone.
In short, until these barriers have been replaced with other mechanisms to protect consumers, the democratisation of finance will never succeed. Until these issues are addressed, the types of disasters that have befallen Robinhood and FTX are likely to become more frequent and more intense.
To put it another way: the operation was successful but the patient died.
Martin Lindstrom is the author of The Ministry of Common Sense and the founder of Lindstrom Company, a business transformation group.
