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In the Red: The Effects of Color on Investment Behavior

53 Pages Posted: 27 Jun 2017 Last revised: 7 Sep 2017

William J. Bazley

University of Miami

Henrik Cronqvist

University of Miami - Department of Finance

Milica Milosavljevic Mormann

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Date Written: July 20, 2017

Abstract

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.

Keywords: Investment behavior; Color psychology

JEL Classification: G02, G11

Suggested Citation

Bazley, William J. and Cronqvist, Henrik and Mormann, Milica Milosavljevic, In the Red: The Effects of Color on Investment Behavior (July 20, 2017). Swedish House of Finance Research Paper No. 17-16. Available at SSRN: https://ssrn.com/abstract=2992812

William Bazley

University of Miami ( email )

Coral Gables, FL 33124
United States

Henrik Cronqvist (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
(305) 515-5898 (Phone)

HOME PAGE: http://sites.google.com/site/henrikcronqvist/

Milica Mormann

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

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