Steering Through the Fog: How Color Coding Affects Decision Making in Noisy Environments

• In Event: Investment and Resource Allocation Decisions

Abstract

Many companies use color codes in their internal performance reports to highlight how current performance compares to performance in a prior period. We examine whether and how 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 reduces the halting effect of noise by facilitating learning processes of managers, not by strengthening managers’ motivation. Our findings have several important implications for research and practice.

Authors

• Victor Maas, University of Amsterdam

• Stephan Kramer, RSM Erasmus University

• Eddy Cardinaels, Tilburg University