The Power of Red

Which chart looks scarier?

Chart JPEG

They’re both exactly the same, except for the color of the downward slope.

Researchers have found that something as trivial as using red changes how investors view their gains and losses — and how they behave.

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.

In addition to illustrating the power of red, this study shows how easily our behavior can be swayed by the smallest thing and has a larger lesson about how with investing, it’s often wiser to follow your plan than go with your gut.

(via Jason Zweig)

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