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Crazy but true: Write financial report in red and you'll get 24% less money

Staff Writer | July 9, 2017
When investors see the color red used to present a firm's financial data, they expect less from the firm's future stock returns than they do when the same data are presented in black.
Investors
Americans   Pessimistic about future investments
That says a new study from the University of Miami School of Business Administration.

So much so, that when a firm's past stock decline is shown in red versus black, investors predicted a further decline in the stock leading them to invest close to 24 percent less in the company's stock.

This effect is broadly consistent with what color psychologists characterize as "red-danger associations" that are often used in U.S. culture to convey extreme caution such as with stop signs and the terms 'red flags' and 'red ink' and therefore, this triggers "avoidance behavior."

For the first time, this study shows the impact that color has on investors' financial decision-making.

Further, the researchers found the effect of the color red is different amongst cultures.

For example, they studied the impact of using red versus black when conveying information among investors in China, where red is usually associated with luck and good fortune.

They found no significant difference in investor behavior whether the information was displayed in red or black in China.

The researchers selected hundreds of U.S. participants and hundreds of Chinese participants to look at separate 12-month periods of S&P 500 companies where negative stock periods were detailed.

The company names were not used in order to prevent any preconceived biases.

Some participants were given reports where the period of stock decline was displayed in red and others were given reports using black color.

They then were asked questions that lead to information regarding whether or not they'd consider buying this stock in the future.


 

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