Do sludges on neo brokers increase trading frequency? Exploring the moderating effect of financial literacy on sludges

Abstract: The choice architecture of neo brokers has been subject to criticism due to potentially harmful effects on investors. Interdisciplinary research has identified design features on neo brokers that may cause increased risk-taking and overly frequent trading. However, there is a lack of empirical evidence regarding the direct relationship between these features and investors' trading frequency. We address this gap, building on the theoretical concept of sludging. Whereas nudges are small changes to choice architectures intended to lead people to better decisions, sludges can make them worse off. Thus, the purpose of this study is to examine whether sludges on neo brokers influence investors to trade more frequently. In an experimental study with N = 285 participants in two randomized groups, we simulate several rounds of trading. We find that participants exposed to a neo broker choice architecture trade 53 percent more than those presented with a traditional broker interface. We also explore potential heterogenous effects of sludges on investors depending on their objective and subjective financial literacy, as well as their financial literacy overconfidence. Moderation effects are not significant, but an exploratory analysis shows that prior experience in the stock market among low-income individuals weakened the effect of sludges on trading frequency. Our findings contribute to the field of consumer financial decision-making by demonstrating that sludges are effective in the context of neo brokers. They also point to the relevance of protecting consumer welfare, especially regarding vulnerable groups.