Does the Color of Feedback Affect Investment Decisions?

This paper presents a multi-period experiment that extends a classic experiment on investment allocation preferences by adding colors to the feedback returned to participants. The results show that investors allocate the same proportion of their investment to the stock and the bond funds without regard to the colors. However, red feedback activates an avoidance motivation (vs. an approach motivation), and this reduces chasing past returns. The authors also found that the color of the feedback affected the time needed to make a decision. Financial institutions might use colored feedback to encourage approach or avoidance motivations in their clients.