Representing financial data in red affects individuals’ risk preferences reveals that representing financial data in red affects individuals’ risk preferences, expectations of future stock returns and trading decisions. This effect is not present in color-blind populations and is silent in China, where red represents prosperity. Other colors do not produce the same results.
The article appears in the latest issue of Management Science.
“Our findings suggest that the use of color on financial platforms such as brokerage websites or retirement service providers deserves careful consideration,” Bazley said. “For example, the use of color may cause investors to avoid the platform or delay important financial decisions, which could have harmful long-term consequences.”
The article, co-authored by Henrik Cronqvist of the University of Miami and Milica Mormann of Southern Methodist University, shows how evolutionary biology and social learning create this color-coded behavior. With respect to Western culture, it is possible that social learning reinforces the biological basis. Specifically, the physiological and psychological contexts in which color is perceived influence its meaning and how humans respond to it.
“In Western culture, the conditioning of red and experience begins when students receive feedback about academic errors in red,” says Bezley.
Red is associated with sirens and stop signs, which communicate danger and draw more attention. Other examples include the state of California issuing a “red flag warning” to indicate imminent danger of extreme fires, or the American Heart Association using red in its guidelines to indicate critical hypertension (blood pressure readings above 180/120) that requires medical attention. Over time, the repeated pairing of a color with a negative stimulus can affect subsequent behavior.
In finance, Bazley was most surprised to find that red seemed to prolong the pessimistic expectations associated with negative stock returns, while viewing the same information in black or blue led to reversal of beliefs.
This, he says, “suggests that the use of color may have a broad impact on stock market liquidity in times of crisis and during momentum anomalies.”
Their research also draws on other examples of color influencing choices outside the financial world. An emerging field called color psychology analyzes how this affects human behavior, and Bazley cites a 2005 study published in the journal Nature, which concluded that the color of sportswear may influence the outcome of the Olympics.
“Just like our everyday choices, our financial decisions are likely to be influenced by factors that are not specific to the decision at hand. This may be due to a variety of reasons, such as our restricted attention span. Ultimately, it suggests that combining aspects of psychology when studying financial decisions may yield insights,” says Bazley, whose “general effects” study is based on eight experiments involving a total of 1,451 people.
He emphasizes that this particular project originated in a neuroscience course in graduate school. The study also benefited from the varied expertise of vision scientist Mormann and behavioral finance expert Cronqvist.
Bazley’s interest in color effects is related to his overall research on the dynamics of financial decision-making.
“Our everyday choices are influenced by a variety of factors,” says Bazley, whose expertise includes behavioral and social influences as well as financial technology.
“A similar process occurs when we make financial choices. We are still in the early stages of understanding these dynamics, but understanding them has the potential to yield insights that can ultimately improve the outcomes individuals achieve from their decisions,” he says.
So what’s Bezley’s favorite red financial term?
“I appreciate the term ‘red herring,'” he says.
“In financial terms, it refers to the preliminary prospectus that companies use when they offer securities to the public. It’s an important document for potential investors, but often key information is overlooked; therefore, it usually has a red disclaimer on the front. I also think the fish is delicious.”
