Carotenoids are among the most prevalent pigments used in animal signals and are also important for a range of physiological functions. These concomitant roles have made carotenoid-based signals a popular topic in behavioural ecology while also causing confusion and controversy. After a thorough background, we review the many pitfalls, caveats and seemingly contradictory conclusions that can result from not fully appreciating the complex nature of carotenoid function. Current controversies may be resolved through a more careful regard of this complexity, and of the immense taxonomic variability of carotenoid metabolism. Studies investigating the physiological trade-offs between ornamental and physiological uses of carotenoids have yielded inconsistent results. However, in many studies, homeostatic regulation of immune and antioxidant systems may have obscured the effects of carotenoid supplementation. We highlight how carefully designed experiments can overcome such complications. There is also a need to investigate factors other than physiological trade-offs (such as predation risk and social interactions) as these, too, may shape the expression of carotenoid-based signals. Moreover, the processes limiting signal expression individuals are likely different from those operating over evolutionary time-scales. Future research should give greater attention to carotenoid pigmentation outside the area of sexual selection, and to taxa other than fishes and birds.