“Dark patterns are design features used to trick, direct, or manipulate users into behavior that is profitable for an entity offering a product or service, but they are often detrimental to users.” -Rohit Chopra, Consumer Financial Protection Bureau
If you’re familiar with behavioral finance, you probably know the power of a good nudge. Nudges are small changes to an environment of choice that nudge a consumer slightly toward behaviors that are personally or socially beneficial (such as automatically enrolling in retirement savings plans or gift giving programs). organs). Thumbs often reduce friction to simplify and facilitate processes. They are the result of behavioral science 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 shed light on the more nefarious side of behavioral product and service design in his latest book, “Mud.”
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 supplier. You’ve probably encountered sludge in the form of bureaucratic red tape, pop-up ads that hide a tiny “close” button in the corner and make the website link look like an exit button, or subscriptions that are easy to initiate but hard to to cancel.
Sludge is part of a larger class of harmful product and service design methods known as dark patterns. These design methods can be obnoxious, but they’re often legal and frustrating. 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.
Deception by design
Dark patterns are design features designed to coerce users into doing something they would otherwise prefer not to do. A four-pack of yogurts, when there are five school days in a week, forces parents to buy more than they want. In video games, “grinding” requires a player to invest hours developing a character’s abilities before actual play is possible. Hours of play are addictive and can contribute to addiction.
In September 2022, the Federal Trade Commission reported an increase in sophisticated dark patterns designed to trick consumers into buying products and giving up their personal information. The report, titled “Bringing dark patterns to light”outlines four main types of dark patterns to watch out for.
1. Design elements that induce false beliefs
- False or misleading claims;
- Advertising elements designed to resemble objective editorial content;
- Comparison sites that appear neutral but rank based on vendor compensation;
- Countdowns for offers that aren’t actually time-limited.
2. Design Elements that Obscure or Delay Disclosure of Material Information
- Bury key terms of service in dense terms of service documents that customers don’t see before purchase;
- Fee information hidden in tooltip buttons where customers are unlikely to see it;
- Drip pricing, in which the advertised cost is lower than the actual cost due to many small additional fees that are added at the point of sale.
3. Design Elements Incurring Unauthorized Charges
- Free trials followed by recurring subscription fees if not canceled in time, disclosed only by a statement that “terms and conditions apply”;
- Initial authorizations followed by misleading additional charges. For example, a child’s game that automatically loads the parent’s Google account, where a green button that normally advances the child to the next level is suddenly replaced by a green “Buy” button that initiates an additional purchase in the application.
4. Design elements that obscure or subvert privacy choices
- Not allow users to permanently opt out of data collection or use;
- Prompt users repeatedly to select the settings they want to avoid;
- Confusing toggle settings;
- Obfuscate privacy choices to make them difficult to access;
- Default settings that optimize data usage and sharing.
Dark patterns in finance
A Princeton University study analyzed online shopping sites and found over 1,800 examples of dark patterns, representing 15 different types. In financial products, dark patterns can take the form of exorbitant interest, costly redemption clauses or hidden fees. Misdirection, hidden pricing, misinformation or intentional obfuscation, and hidden costs are common dark patterns.
Here are some examples of financial products.
1. Predatory lending
- Equity stripping, where lenders make loans based on the equity in the home, regardless of the borrower’s ability to repay;
- Bait-and-switch, where lenders promise one type of loan but, for no good reason, switch to a less advantageous one late in the process;
- Loan reversal, where a lender sells a loan and the customer is faced with paying points or fees;
- Hidden lump sum payments, where what is presented as a long-term loan with a low interest rate turns out at closing to be a short-term loan that needs to be refinanced in a few years.
2. Misleading Advertising
- Wholesale investment ads aimed at “mom and pop” retail investors;
- High pressure selling tactics with artificial urgency, pushing investors to enter quickly.
- Charges, 12b-1 fees, management fees, trading commissions and account fees may be legitimate but are often obscured or hidden from investors who do not know how to look for them;
- Annuity commissions, redemption fees and rollover fees (ask before signing);
- Early withdrawal fees that are not well disclosed;
- Inactivity fees, administrative fees and beneficiary fees hidden in dense and complex terms and conditions.
4. Downright Scams
- Boiler room scams, where professional cold calls convince inexperienced investors to buy shares in worthless or overpriced investments;
- Ponzi schemes, where a scammer takes money from one victim, then takes money from a second victim to pay off the first, and so on, creating the illusion of solvency.
- Share scams, where someone pretending to be a broker takes money for investments they never intended to make on behalf of the investor.
As research into dark patterns continues, we will no doubt see more and more tools to recognize them and easily report problematic products and services. We may one day have artificial intelligence analyzing the terms and conditions of a product or service and pointing out dark patterns in milliseconds. It is not possible today.
For now, investors should educate themselves on how financial and technology products are constructed and examine the market for transparent, mud-free products. If you want to dive deeper, the links in this article will take you to additional resources for identifying bad actors in the market so you can spot them before they target you.