How do chameleons change color and know which color to change to?

"It's a popular misconception that the chameleon changes its color to match that of the background," says Encyclopedia Britannica Online.

Light, temperature, and emotions determine color changes.

Most chameleon species have a basic color and pattern that suits their habitat and provides camouflage. They change color to communicate mood changes to other chameleons. An angry chameleon goes "black with rage", says the International Wildlife Encyclopedia.

He can change to various shades of green, blue-green, turquoise, and black.

The transparent skin of a chameleon has four layers which work together to produce various colors. The outside layer has two kinds of color cells, yellow and red. Just inside this layer are two more layers that reflect light: one blue and the other white. The innermost layer — important and complicated — contains pigment granules (melanophore cells).

The melanophores have a dark brown pigment called melanin, the same substance that colors human skin brown or black. The main body of each melanophore sits like a brooding octopus beneath the reflecting layers and sends tentacle-like arms up through the other layers.

The color cells alter size, which changes the amounts of red, yellow, and dark brown in the skin and this, in turn, alters skin color. The reflecting layers modify these effects. Where the skin has a blue layer under yellow cells, the blue reflects through the yellow and changes it to green. Where the blue layer is missing, white shines though and enhances the yellow and red above.

The skin brightens when the cells pull the dark melanin from their tentacle-like arms into their bodies. The skin darkens when the cells spread the dark pigment through their arms into the upper layers of the skin. The brownish black color then obscures the white layer, darkening the skin like a black cloud darkens the land.

That's how the chameleon changes color. It knows what color to change to just as we do when we turn red with embarrassment.

http://www.wonderquest.com/Chameleons.htm

I've read that even blind chameleons change color, so they don't "know"; Drublic's answer sounds pretty authoritative about "how".

Contrary to popular belief chameleons do not change colour to match their surroundings. Their colour change is affected by hormonal or mood changes and is a reflection of nervous activity. The colour change is a means of communication. Changes occur when they are frightened, sexually receptive, carrying eggs, courting etc. Their 'calm' colour pattern is usually the only one that is likely to be an effective camouflage colour. So, to answer your question, a blind chameleon can still change colour the same way as a blind human can still speak because this process is nothing to do with it's environment.

they go to a paint shop and look at all the colours. when they find one they like, they paint themselves

They also can feel the ground on which they are standing, and their sensors let them change. Easy.