How Color Influences Your Stock Trades | Marginalia Episode 2

How Color Influences Your Stock Trades | Marginalia Episode 2


If you’ve ever wondered why bulls charge
when they see red, the answer is they don’t. Bulls are actually red-green colorblind,
and they charge because they’re irritated by the cape’s movement, not its color. Matadors don’t use red capes for the bull it’s
red for us. The red hides the splatters of blood, which
may be too hard for the audience to stomach. Since the 1700s, red has been a symbol for
the bull’s anger. Color is a language soaked in moods and meanings:
for example, in Western culture, red is bloodlust, heat, and passion. Green is life, luck, and wealth. Blue is sky, sea, serenity but also melancholy. Sometimes we’re aware of these associations,
but sometimes color unwittingly affects us. Red, in particular, can trick our brains
and has even been shown to affect performance: subjects solved anagrams more slowly when
they were shown on red backgrounds versus blue backgrounds. In the Athens Olympics, boxing, Taekwon-Do,
Greco-Roman wrestling, and freestyle wrestling competitors were assigned a random uniform
color: red or blue. Those wearing red were significantly more
likely to win their event. Psychologists believe that because anger can
sometimes redden skin due to increased blood flow, humans have evolved to associate red
with aggression, so athletes wearing red may seem more intimidating. But just as red may intimidate a boxer, it
can also intimidate investors. Imagine you’re shown a stock chart in green
and red. If you’re like most people, the stock shown
in red will appear to be performing worse even if the price change is identical. Multiple studies have shown that when information
is presented in red, investors are more pessimistic about a stock’s future performance and less
likely to take a risk. But there are some investors who are immune
to this color bias. Researchers have looked specifically at Chinese
investors, due to their different cultural associations with the color red. In China, red is lucky: according to legend,
every New Year, a beast named Nian would terrorize villagers, eating crops and children. But Nian’s one weakness was fear of the
color red, so villagers hung red lanterns, and today, during Lunar New Year’s, Chinese
people exchange hongbao: lucky red envelopes filled with money. Chinese stock exchanges display rising prices
in red and falling prices in green. Perhaps because of this, when Chinese stockbrokers
were shown the color red, they performed better on IQ tests. There’s one more group of investors who
isn’t susceptible to the color bias. If you see the number 29 here, you probably
have normal color vision. But if you don’t, you may have a red-green
color vision deficiency. One study confirmed that the color red didn’t
have an effect on color-deficient investors. If you’re not color deficient, one way to
remove color bias from your trading is to simply switch the settings on your trading
platform to black and white. But if you don’t want to rely solely on
your eyeballs to tell you which direction a stock is moving, you can learn tools to
help you better identify trends. Technical indicators, which are graphical
representations of stock data based on a specific formula, may offer a more objective way to
examine a stock’s performance over time. Sometimes it can be difficult to tell which
direction a stock is actually moving. To confirm its trend, you could look at an
indicator called the simple moving average, or SMA, which shows the stock’s average
price over a period of time. If a stock’s 50-day SMA crosses below its
200-day SMA, many investors see this as a death crossťan indicator of recent
poor performance that could potentially continue long term. There are many more technical indicators that
reveal information about a stock’s price and volume. Looking for multiple data points may help
investors make more informed decisions. You don’t have to let the color red scare
you away from buying stocks. Just because you’re not colorblind like
a bull doesn’t mean you can’t be bullish.

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