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In the general timeframe that fantasy RPGs are generally presented, color WAS a status symbol based on the rarities of the materials with which to make the dyes to provide the colors, thus the upper class had more vibrant colors while the lower classes tended to have more earthen tones.
(From teh Wiki)
The middle class could usually afford to dye their wool and colours such as blue and green.[78] The wealthy could afford to add elaborate designs to their clothing as well as dying it red and black, expensive colours for the time.[65] Purple was also considered a colour of royalty and was reserved for kings or religious figures such as the pope.[62]
As a serious medieval reenactor, I take issue with this response.
First of all, UO does not represent the medieval period--not remotely. Monsters, people armed with swords etc. does not make things period. Where do I start--perhaps with the spinning wheel, which in the form used by UO did not reach its from until Leonardo Da Vinci made some refinements to the design. The loom is almost completely wrong. What is shown is a small upright loom similar to the one used today in producing small carpets, and used in Anglo Saxon times. Correct for early period would be the warp-weighted loom--complete with a pit in the floor. The most common loom after the 12th Century would have been the treadle loom or the draw loom. The sheep, too would be closely guarded--to keep people from stealing them and the wool.
One of the most valuable commodities in period was fabric. Cotton was rare. When lace became fashionable, linen thread was literally worth its weight in gold. Lets not even go into the clothing.
Purple was reserved for royalty in roman times but not necessarily in the medieval period. This would depend on the sumptuary laws, which varied by locality. Wikipedia is making a very broad generalization about color and fabric--which is at best only partially accurate.
But since nothing else in the game is period--why should color be. In fact, why isn't color accurate. Wealthy interiors like Lord British's castle, banks, etc would glow with color. The walls would be covered with rich tapestries or beautiful, colored frescoes. The furnishings would be draped with expensive colorful fabrics. The gray interior walls of the large tower, castle and keep would have been concealed.
What I am really asking here, in fact, is why the dominant colors in the environment are so drab? Look at Vesper bank (shudder). The dull brown walls in Britain. I am not saying that the game needs to be a Disney style techni-color dream, but if you want more players brighten it up a bit.