Taking the emotion (and colour!) out of investment decisions

9th September 2021

The psychology of investing is fascinating. There are so many behavioural traps that investors may find themselves falling into as markets fluctuate and knee jerk reactions take hold. The anchoring trap is a prime example, where investors over rely on their perceptions of an investment which may be totally incorrect, rather than being flexible in their thinking and responsive to new data.

Separating emotions from investment selection and market reaction is indeed a whole different challenge. Managing impulses as markets and stocks fluctuate, and grossly underestimating risks associated with investments, are just a couple of reasons why investors sometimes make suboptimal decisions based on emotion, which can result in financial loss.

Red rag to a bull

Another added complication has been highlighted by an interesting new study1 which shows that financial information presented in red tends to make people more pessimistic about the market than the same facts presented in blue or black. It seems that using the colour red to represent financial data influences individuals’ risk preferences, expectations of future stock returns and trading decisions, effects not present in those who are colour blind, and they’re muted in China, where red represents prosperity.

Assistant Professor of Finance at the University of Kansas, William Bazley, who undertook the research, commented on the findings, “The use of colour could lead to investors avoiding the platform or delaying important financial decisions, which could have deleterious long-term consequences. In Western cultures, conditioning of red colour and experiences start in early schooling as students receive feedback regarding academic errors in red. Red is associated with alarms and stop signs that convey danger and command enhanced attention.”

On our best behaviour

The good news is that you can avoid these potential pitfalls. You can rely on us to take the time to understand your objectives, apply a rigorous process and advise you on the strategies and products most appropriate for you.

Financial advice is key

If you’re concerned about your finances or need help with basic financial topics, we aren’t here to judge. We’re on hand with simple, jargon-free advice that will provide you with the confidence and understanding you need to take control of your finances once and for all.

1The University of Kansas, 2021

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.