The behavior management approach used by your grandson's teacher is relatively common. Typically, children start with a clean slate each day and children who are "good" over the course of a week get some sort of positive reinforcement. This system is based upon relatively simple principles of behaviorism, operant conditioning. That is, children are motivated to perform certain voluntary behaviors in order to gain a reward. According to behaviorism, over time, children will engage in more positive behaviors and fewer behaviors unrelated to the reward (negative behaviors).

However, behaviorism does not account for other internal factors, such as self-will and emotional well-being. For example a depresed child may be unable to conjure the energy to demonstrate certain behaviors. Over time, they may become increasingly discouraged because they never get the reward and it may only reinforce their depression.

Thus, overall, I agree with your assessment. Behavioral approaches to classroom management are appropriate and effective for the majority of children in a classroom, but they may not help all children to succeed. If your grandson or some children in the classroom are not able to be successful with the above approach, it may be useful to explore the ways in which the approach is implemented. Are all children reminded on a daily basis that they have an opportunity each and every day to "start over"? Is the teacher using labels to associate the colors? Certain tweaks to the system should provide all children with an opportunity to do well.

Hope that helps.