Round Numbers

The Dow Jones Industrial Average closed at 15,056.20 on May 7, the first time the benchmark surpassed 15,000 at the end of a trading day. Millions of people took notice of this meaningless event.

If you know anything at all about baseball, you can name the last major league hitter to have a batting average above.400 for a full season – and you also know his exact average and when he did it, even though you probably were not yet born when it happened. (Ted Williams, .406, 1941.) (1) Serious runners, and a lot of other people, know that Roger Bannister was the first person to run the mile in less than four minutes, in 1954. A four-minute mile, which was once a huge psychological barrier, has become routine these days. There might be all sorts of reasons for this rapid evolution in human speed. I figure today’s runners have better shoes, but the knowledge that it can be done probably plays a big part too.

Round numbers command our attention and affect our behavior in ways far out of proportion to their significance. This is true for all of us. Understanding this tendency can help us make better decisions.

You might have heard that the Internal Revenue Service recently acknowledged that it singled out conservative organizations for special scrutiny when they applied for non-profit status. It is a major national story that broke, as such news often does, on a Friday – in this case, May 10.

Yet the lead story in the next day’s New York Times was a report that scientists atop a mountain in Hawaii had measured the atmosphere’s carbon dioxide level at 400 parts per million. The paper described this as a “milestone” in the course of global climate change. Leaving aside the question of how much credence to give climate predictions, I think the milestone description is accurate. A round number is a marker that, like a roadside sign, can tell you how far you have come, even if it says nothing about where you are going.

But was it the most important news story that day, worthy of leading the front page of The Times? It was not the first time the 400-ppm level had been recorded at the Hawaiian site; it was just the first time it had been measured at that average level over a 24-hour period. Such levels have also been recorded at other sites previously (mostly in the Arctic); those sites just don’t have the historical continuity of the Hawaiian research facility, which offers data that dates back to the 1950s.

And as it turned out, the measurement that was the basis of the Times story was wrong. The average CO2 concentration on that day did not, in fact, reach the 400-ppm level. (The Los Angeles Times, having invested far less in hyping the original figure, simply reported the downward revision below the benchmark; The New York Times fudged by saying that while federal scientists now believe the 400-ppm level was not reached, another group’s measurements still crossed the goal line.)

Journalists have a concept they call “news judgment.” It refers to the ability to discern what information is genuinely new and what isn’t, and the relative importance of each. The IRS admitting it targeted conservatives was new information. The fact that atmospheric carbon dioxide levels are rising was not, and the 400-ppm “milestone,” even if it had been crossed, was of no particular climate significance. At 399 or 401 parts per million, carbon dioxide’s effect on our weather (whatever it may be) is the same. Seen most charitably and, I think, most realistically, The New York Times’ editorial staff was seduced by the power of the round number.

Of course, not everyone sees the decision so charitably, and the paper’s credibility took a hit. Washington Post opinion writer George Will took note: “Episodes like this separate the meritorious liberals from the meretricious. The day after the IRS story broke, The Post led the paper with it, and, with an institutional memory of Watergate, published a blistering editorial demanding an Obama apology. The New York Times consigned the story to page 10 (its front-page lead was the umpteenth story about the end of the world being nigh because of global warming). Through Monday [May 13], the Times had expressed no editorial thoughts about the IRS. The Times’s Monday headline on the matter was: ‘IRS Focus on Conservatives Gives GOP Something to Seize On.’ So that is the danger.” (2)

A few weeks ago I counseled a client who was debating whether to exercise a final batch of stock options he held from his former employer. To respect that client’s privacy, I will change the numbers here, but the gist was that he had been hoping to exercise the options when the employer’s stock reached $24 a share. After a recent rally, the stock was trading slightly below that level on the day of my visit. But now the client was wondering whether to hold out for $25 a share, a level the stock had reached only once, quite a few years ago. It would have needed to reach the target by the fall, at which point the options were going to expire.

I told my client that I would exercise immediately if I were in his shoes. A sudden downturn in the overall stock market or in the particular company’s stock could render the options permanently worthless. Holding out for a few extra dollars by waiting to hit the arbitrary $24 target seemed pointless.

My client gave the order to exercise his options on the spot. He is now happily redeploying his cash. And though the stock’s subsequent price is irrelevant – there is no reason to care what a stock does after you have sold it – it happens that after only briefly touching $24 a couple of times, it has also had some significant dips since my client sold. As of Friday, it was trading right where it was on the day of my visit.

Round numbers exert a strong power in our calculations. It pays to remember that they really have no special power at all.

Source:

1) Baseball Almanac, “Ted Williams hits.406 in 1941”

2) The Washington Post, “In IRS scandal, echoes of Watergate”