White Balance
When we see an object, its apparant colour is a combination of the colour of the object and the colour of the light it is reflecting. If you shine yellow light on a white object, it will look yellow. Or rather, it looks yellow for a camera. The human brain is very good at compensating for light colour changes so that white remains, roughly, white (as long as the colour of the light is not too intense). Because of this mental trickery, you probably don't realise just how big a difference there is between different light sources. Your camera doesn't have the benefit of a human brain to fool it into thinking that white is white though, so it needs a little help. The setting that controls this is called White Balance.
The light temperature scale
Most light sources that we deal with have a hue whose colour lies on a specific line in the colour space. This line corresponds with the colour of light given off with a (theorethical) "black body radiator" when heated to varying temperatures. Think of it as the colour of hot metal: from red hot to white hot (or in fact blue hot). The different hues are labeled with this temperature and put on the scale:

On the image above I labeled several light sources and their corresponding temperatures (light temperature is expressed in Kelvin, the international unit of temperature). The blue labels indicate white balance presets as defined by Olympus.
A note on terminology: On the graph you can clearly see that the higher the colour temperature, the bluer it gets. However in common usage blue is considered a colder colour than red (mainly because fire is red). We speak of a "cool blue" where-as according to this terminology it's actually hot. If you buy a "cool white" compact fluorescent lightbulb, the light colour will actually be higher than that of normal ones.
Getting it wrong
So what happens when you or the camera gets the white balance wrong? Well, the camera presumes that whatever the white balance is set to should be the colour of whites and grays. Upon creating the jpg, the camera will adjust the colours to make this happen. If you were using the wrong white balance setting it will do so incorrectly. If you used too high a temperature setting, your image will look too yellow or red, if you use too low a temperature, your image will be too blue. The effect can be quite severe and is especially noticable on skin tones (for mainly psychological reasons: we know what skin tints are naturally possible).
Below are three versions of the same image. The first is set to the correct white balance of 3800K. Notice how the shirt the lady in the background is wearing is white. This isn't coincidense: I told the converter that it was white and used that as a base for the white balance. The converter then adjusted all the other colours accordingly. You may notice that 3800K isn't on the graph above. This is because the picture was shot under mixed light: light from incandescent light combined with sunlight seeping in from outside.
The second image was set to 7500K, which is the camera's "outside in the shade" setting. As you can tell, the colours are completely off here, being much too yellow. 7500K is way too hot a white balance: the camera thinks white should be a lot bluer than it really is, and therefore it doesn't believe the whites are actually whites and treats them as yellows.
The third image is the opposite: here the white balance was set much to cold at 2000K and the resulting image is very blue.

These examples are extreme, but can easily happen by accident if you forget to change your WB setting. For instance if you use the sunny setting indoors or if you use the incandescent setting outdoors.
Getting it right
Seeing the penalty for getting it wrong, how do we get it right? Well, here things get tricky as, again, the camera is pretty dumb. You basically have five ways to tell the camera what to do, which I'll explain here.
Auto White Balance
The easiest option is to just leave white balance on auto. When outside durnig the day or when using flash this actually gives pretty good results but inside it gets confused very easily. While the results are not as awful as the examples of bad white balance above, they will rarely be perfect (or even very good). In some cases the auto balance will be outright bad. On top of that, auto mode recalculates white balance for every shot. This means that your colour temperature may change between shots, which creates an annoying inconsistency in series of images.
So why use it at all? Well, when you really have no clue (due to mixed lighting for instance), the auto balance may still get things better than you can. However, generally auto white balance is discouraged.
Note: Cameras with an external white balance sensor like the E-3, E-30 and E-620 fare a little better with auto white balance, but even here the results are far from perfect.
White Balance Presets
I already listed the built-in white balance presets in the graph above. You can choose between these by pressing the button labeled WB and using the thumb wheel. I'll list them again here in the order they usually appear in that list, with some additional comments.
| Setting | Temperature | Description |
|---|---|---|
| Auto | - | The auto white balance setting, as described above |
| Sunny daylight | 5300K | If you're outside during the day and it's sunny, use this one. Direct sunlight is very strong so will generally drown out any other light sources. |
| Daylights shadows | 7500K | This is the bluest of the presets and the most situational. It is used when you're outside, in the shade, taking pictures of things that are in sunlight. Personally I don't really bother with it. |
| Clouded daylight | 6000K | Clouds filter out some of the yellow from sunlight, so your whites become a bit more blue (actually at this point just less red). Note that the difference between 5300K (sunny) and 6000K (clouded) is relatively small so you can use the wrong one without the result looking too wrong. |
| Incandescant | 3000K | In case you don't know what incandescant lightbumbs are: they are the traditional style (pear-shaped) lightbulbs which are being phased out in favor of more economical compact fluorescent bulbs (the spirally ones). Incandescent light is the reddest setting your camera has and can also be used for firelit scenes in a pinch. |
| Fluorescent 1 | 4000K | Fluorescent lights come in many shapes. Traditionally they were long tubes and used in hospitals and office buildings. These days we have compact fluorescent lightbulbs which fit normal light sockets and which are generally spirals or bent tubes. The problem? There's dozens of different fluorescent lights all with different color temperatures going from "warm yellow" to "cool white". We got three settings here, but most likely none of them really matches the lights. |
| Fluorescent 2 | 4500K | |
| Fluorescent 3 | 6600K | I kept this one separately because it is quite different from the other two. Look at that temperature: 6600K. That's hotter than clouded daylight. This setting is specifically meant for "full spectrum" or "daylight" bulbs which are generally advertised as either 6400K or 5600K. Personally I simply use sunny daylight setting with such lights, but sometimes fluo3 will work better. |
| Flash | 5500K | The flash colour is generally aimed to be close to sunny daylight, but it's not quite there, so here's a special setting for it. Honestly though, the difference with sunny daylight is minimal. |
That's a whole bunch of presets there and it seems simple enough to pick the right setting for the job. Sadly, reality is rarely simple. While in theory you can use the incandescant light setting if your scene is lit with such lights, in practice that only works if these lights are the only light source. Generally this is not the case and you're facing mixed light which can drastically change the light temperature. Remember my sample above at 3800K? That was combining Incandescant light with indirect sunlight. That difference of 800K at this range is clearly noticeable in skin tones.
Another problem is that the presets are just guesses. Not all incandescant lightbulbs produce exactly 3000K light.
Reference White Balance
Here's my favourite way of getting white balance right indoors. To use it however, you first have to set your FN button to Reference white balance. How to do so depends on your camera model and can be found in your manual. For the E-3 it's in the "Settings B" menu.
Once that has been set up, you can get the exact white balance for any scene. Simply find a white or gray surface which is lit by the same lights as your scene (carrying a gray card is a good way of always having such a surface handy). Simply point your camera at the surface, hold the FN button with your thumb, take a picture and press OK to confirm. You've now told the camera what colour should be neutral and it will use that measured value for the next shots (until you change it again with the WB button or take a new reference pic). Note that the reference picture you took is not saved to your card.
Custom White Balance
When the presets don't work, you can simply enter a temperature value of your choice using custom white balance. Good if you know the exact light colour either because you measured it with an external white balance meter, or because you simply know the lighting situation very well (say in a studio).
Do it in RAW
The final way of getting white balance right is to shoot RAW. In fact I'd say that in cases of severe mixed light you should use RAW, even if you normally always shoot in JPEG. The reason is that any white balance adjustments are done in the raw conversion stage (if you shoot JPEG this conversion is done in-camera) anyway. Therefor if you're not sure, leave it for post. Then during raw conversion you can find a neutral surface somewhere in your picture (or in a similar one in the same series) and tell the convertor to use it as a base. This gives the same effect as using reference white balance, with the advantage that you can do it afterwards.
Note: If you plan to fix WB in post, make sure your WB setting is not set to one of the extreme values (like daylight shadows) as this has a slight effect on exposure. Best to use either auto or reference white balance, as this will make the required changes smaller and give you a better image review.
Raw conversion will be discussed in more detail later.
