In the Red: The Effects of Color on Investment Behavior

Financial decisions in today’s society are made in environments that involve color stimuli. In this paper, we perform an empirical analysis of the effects of color on investment behavior. First, we find that when investors are displayed potential losses in red, risk taking is reduced. Second, when investors are shown past negative stock price paths in red, expectations about future stock returns are reduced. Consistent with red causing “avoidance behavior,” red color reduces investors’ propensity to purchase stocks. The findings are robust to a series of checks involving colorblind investors and alternative colors to control for salience effects. Finally, the effects are muted in a cultural setting, e.g., China, where red is not used to visualize financial losses. A contribution of this study is to introduce hypotheses from color psychology and visual science to enhance our understanding of the behavior of individual investors. ∗We are indebted to Dan Egan, Director of Behavioral Finance and Investing at Betterment, for informative discussions about the visual representation of financial data from an industry perspective. We are also thankful for comments from seminar participants at Asian Finance Association, Charles III University of Madrid, China Europe International Business School, Consumer Neuroscience Symposium, Florida International University, IE Business School, Interdisciplinary Center (IDC) Herzliya, Maastricht University, Michigan State University Federal Credit Union Conference on Financial Institutions and Investments, Nanyang Business School, Norwegian School of Economics, Norwegian Society of Financial Analysts, Research in Behavioral Finance Conference, Securities and Exchange Commission, SHU-UTS SILC Business School, Triennial Invitational Choice Symposium, University of Arkansas, University of California San Diego, University of Miami, University of Michigan, University of Münster, Yale University Whitebox Advisors Graduate Student Conference, and Nick Barberis, Scott Bauguess, Shlomo Benartzi, Indraneel Chakraborty, Francesco D’Acunto, Stephen Dimmock, Bob Dittmar, Cary Frydman, Paul Gao, Mark Garmaise, Markus Glaser, Charles Hadlock, Sam Hartzmark, David Hirshleifer, Mark Humphery-Jenner, Zoran Ivković, Han Kim, Jeremy Ko, Alok Kumar, Andy Leone, Michelle Lowry, Roni Michaely, Adair Morse, Serene Ni, Marina Niessner, Désirée-Jessica Pély, Christo Pirinsky, Hong Ru, Maya Shaton, Tyler Shumway, Paul Smeets, David Solomon, Denis Sosyura, Dick Thaler, Neng Wang, and Frank Yu. We thank Riva Trivedi for excellent research assistance and Ye Fang for assistance with experiments in China. We appreciate the feedback from the perspective of color psychology by Andrew J. Elliot, Professor of Psychology. We acknowledge research funding from a Center for International Business Education and Research (CIBER) Mini Grant Award and from the Office of the Provost at the University of Miami. The University of Miami Institutional Review Board (IRB) approved the research methods used in the paper (IRB Protocols #20140317 and #20170423). †All authors contributed equally to this research and are listed in alphabetical order. Bazley and Cronqvist: University of Miami, School of Business Administration, Department of Finance (wbazley@bus.miami.edu and hcronqvist@bus.miami.edu); Mormann: Southern Methodist University, Cox School of Business, Department of Marketing (mmormann@mail.cox.smu.edu).