The iMac simply does not support 16 colors. Here is my theory concerning perhaps some programs that "require" 16 colors:
1. The game checks if you are in 16 color mode.
2. An iMac is never in such a mode, so it asks you if it's OK to switch to 16 colors.
3. The game attempts to switch to 16 colors. QuickDraw receives this request and changes to the nearest choice available (256 colors) instead. You see the screen flash as this happens, thinking it has now gone into 16 colors mode.
4. The game only knows that some screen change occurred. It does not check if the monitor is now really in 16 colors. Perhaps QuickDraw does not send back an error in this instance, or the game does not even check for the error!
5. The game proceeds to run, except more slowly than if 16 color mode had been available. Because the iMac is so fast compared to the Macs available when the game was first released, this slowdown goes unnoticed.