Learning about the numerosity heuristic can save you money.
As a three-time CEO, I’ve had a lot of experience with incentive stock options and have been appalled by how poorly they are understood by employees. Many employees fixated on the number of shares they were granted, rather than the percentage of shares outstanding. They would multiply their number of shared granted by some arbitrary share price to determine how much money they might make. “All my shares for $10” was a common refrain.
My first CEO gig exemplified the issue. After a poor year, we had to raise additional capital under terms much worse than the previous round and dramatically increased the number of shares issued from 10M to 40M. The board realized this 4X dilution could be devastating on employee morale and tried to partially mitigate the impact by issuing new options to all employees.
After I explained the situation at an All Hands meeting, a senior engineer thanked me for the additional grant which increased his shares from 40K to 60K. He believed he now had a greater likelihood of buying a house. I explained to him his ownership had gone from 0.4% (40K/10M) to 0.15% (60K/40M) but that didn’t seem to sway him. In his mind, the 40M total shares showed the company was more valuable than before and therefore his shares were also worth more.
Although I didn’t know it at the time, that engineer was exhibiting the numerosity heuristic. In “How to Make a 29% Increase Look Bigger: Numerosity Effects in Option Comparisons”, Pandelaere and Briers use a series of experiments to systematically show numerosity can impact consumer preference. In their words:
When consumers evaluate the difference between two attribute levels, they may pay more attention to the number of units rather than the type of units, such that they appreciate a 24-month warranty difference more than a two-year warranty difference because they rely on the number of units rather than their type.
People tend to equate bigger numbers with bigger quantities, even if they have different denominations. We will likely pay more for a 7-day vacation than a one-week vacation, and complain less about a flight that is delayed for 1 hour than for 60 mins. We even believe there is a larger quality difference between two items rated 700 and 830 (on a 1000 point scale) than the same items rated 7.0 and 8.3 (on a 10 point scale).
Marketers should take note. Numbers can persuade and apparently size does matter.
The numerosity heuristic suggests I should give out annual bonuses in pennies rather than dollars.