There's many more reasons, but that's a big one. No one is going to come work for a company for equity that doesn't care about their stock price.
Yeah, superhard way of making millions. Making a web site in your 20s and convincing the pension funds to give their savings from 30 years of real "hard work" while trying them not to notice the scam before you sell all your stock.
Bringing psychology back in, yes I can see how it would really tear people up to feel like they are "missing out," and the understanding that they are getting the "true value" is probably not much of a substitute. If the money in my bank account fluctuated daily, for reasons beyond my control, it would drive me right up the wall.
What??
Facebook employees apparently work pretty hard. They get huge rewards, when their stock goes up, so they want to company to succeed.
Once the stock stops shooting up, they stop caring about the company. They won't make money from their stock options, they'll make money from getting promotions or a good bonus. Impressing their manager is going to be more important than the company's overall success.
Employees will lose interest, and managers will have to introduce more rules, to "incentivise" the workers (and other managers).
Gets down to the classic: it's not what you do but how you are seen to be doing it.