Navigating Through the Noise: The Effect of Color-Coded Performance Feedback on Decision Making

Abstract

Many companies use color codes in their internal performance reports to highlight how current performance compares to performance in a previous period. We examine whether the use of color coding affects managers’ decision making in a resource allocation task. We argue that managers’ decision accuracy will be lower if they receive noisier feedback, but that this detrimental effect of noise can be mitigated through color coding. Using two experiments, we find evidence consistent with our theory. Managers who receive reports in which performance increases are color coded green and performance decreases are color coded red are less affected by noise than managers who receive feedback reports without color coding. Supplemental analyses suggest that color coding induces managers to process feedback in a more holistic manner, which reduces the adverse effect of noise on managers’ learning processes. Our findings have several important implications for research and practice.

Keywords: Color coding, Feedback, Learning, Noise, Performance measurement

JEL Classification: D91, G40, M10, M40