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The Color Red May Determine If You Buy Or sell A Stock

By Rupert Hargreaves. Originally published at ValueWalk.

Things that impact investors’ decision on whether or not to buy/sell a security: the company’s fundamentals, its intrinsic value, the margin of safety, possible disruptive factors, competitive advantage and what color the stock ticker is, yes the color red or green impacts decisions says a new study.

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It may seem like a wild accusation, but according to a new research paper titled, The “Effects of Color on Investment Behavior” the color of a stock ticker really does influence investors’ opinion on the equity in question. The use of red and green to denote whether or not a stock is up or down in the day’s trading is used widely to help investors quickly understand what’s happening to their investment portfolio. But these time-saving measures may be influencing decisions more than investors would like.

Color Red Influences Your Investment Moves

Of particular interest in the study is the research on how different colors effect the speed of decisions. According to the researchers there is some evidence that red color may cause elevated awareness and more analysis by an investor prior to making financial decisions, and while the color red was shown to have no impact on the speed of decision made by investors in the study, individuals in the red condition made their decisions about 2.6 seconds (8.6%) slower than those seeing any other color.

Displaying stock prices in red also had some other effects on investors. For example, it was found that the investors who view past negative returns in red believe that the stock price will continue to decline and the propensity to purchase stocks is much reduced. Further, when investors are shown past negative stock price paths in red, expectations about future stock returns are reduced significantly.

To improve these conclusions, the researchers conducted a number of tests with robust checks involving colorblind investors and alternative colors to control for salience effects. The paper also finds some interesting results when testing across cultural boundaries. Specifically, it finds that the effects of red are significantly muted in China, where red is generally not used to visualize financial losses, broadly consistent with what color psychologists characterize as “red-danger associations” and that red color is causing “avoidance behavior.” All of these findings point to the conclusion that if you want to reduce psychological biases in your investment process, viewing stock prices with a neutral color theme may be a great place to start.

The post The Color Red May Determine If You Buy Or sell A Stock appeared first on ValueWalk.

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