Risky Business: How Colour Affects Your Investment Decisions

My wife and I recently vacationed in New Mexico, where we quickly learned that the colour red usually signifies some kind of danger. We figured this out the hard way — by scorching our mouths a few times.

Wait staff in just about every restaurant there will inevitably ask "Red or green?" — a question about which colour of chili sauce you'd like your meal smothered with. For unassuming tourists who haven't done the necessary research, like us, the seemingly innocuous decision that follows can have dire, lip-burning, eye-watering consequences.

Red chili sauce, it turns out, is generally hotter than its green cousin, at least in New Mexico. Exact spiciness varies depending on location, the specific peppers used in the sauce, cooking techniques and other factors.

By the end of our trip, we had learned that with chili sauce — just as with traffic lights — red usually means "stop" while green means "go," at least for our wimpy palates.

Food spiciness isn't that far removed from investing. When it comes to buying stocks or other investments and making other financial decisions, red can also mean "stop" while green says "go," according to a study on colour effects first published in 2017 by researchers at the University of Miami and Southern Methodist University.

"Financial decisions are made in environments that involve color. However, perception of color influences behavior," says the report, titled In the Red: The Effects of Color on Investment Behavior. It later adds that when investors are shown potential financial losses in red, "the propensity of taking risk is reduced significantly."

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The report authors arrived at their conclusions after performing a series of experiments. In one, they offered test participants a number of pairs of betting choices, with each pair consisting of a lower-risk option and a higher-risk option. For example, one pairing consisted of the following choices: a 70-per-cent chance of winning $2 and a 30-per-cent chance of losing $1.50 (lower-risk option); or a 70-per-cent chance of winning $4 and a 30-per-cent chance of losing $5 (higher-risk option). Some participants were presented all of the information in black type; others saw all potential losses displayed in red.

When researchers displayed potential losses for each choice in red instead of black, the "investors" took about 25 per cent less risk.

The authors also monitored activity on a variety of online investment platforms in the United States, including large brokerages and stock exchange websites, and found similar results.

They surmised that an aversion to the colour is both biological and culturally learned.

"[R]ed is the color of many objectively dangerous phenomena that humans encountered in early societies, such as blood or fire, and a red face may be caused by a testosterone surge in an attack-ready opponent," the report says. "Second, a social learning explanation implies that color associations emerge from repeated pairings of a colour with particular concepts and an individual's experiences."

In financial circles, the colour red has indeed become associated with negative outcomes, the report argues, as evidenced by terms such "in the red," "red flags" and "red herring."

Cultural differences come into play, though. Similar experiments in China found less risk aversion tied to red, which is generally regarded as a benevolent colour. In China, red is associated with good fortune, important festivals and the country's flag.

The researchers' findings were further reinforced through experiments with colour-blind individuals. "We conclude that red color does not influence the expectations about future stock returns among colorblind individuals," the report says. "Switching off the underlying characteristic has the effect that colorblind individuals are immunized to the effect of color on investment behaviour."

Ultimately, the study is part of a new field in investment economics known as "visual finance." A growing body of research suggests that how people see their results and returns significantly contributes to their decisions on what to do with their money.

Paying attention to colour may very well be a good idea when it comes to investing — just like when choosing your chili sauce.

The title of this article was changed on October 17, 2018.