Coarse Categories in a Complex World

Thomas Graeber (), Christopher Roth () and Marco Sammon ()
Additional contact information
Thomas Graeber: Harvard Business School
Christopher Roth: University of Cologne, CEPR, NHH Norwegian School of Economics, & Max Planck Institute for Research on Collective Goods
Marco Sammon: Harvard Business School

No 364, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: Most news stories contain both granular quantitative information and coarse categorizations. For instance, company earnings are typically reported as a dollar figure alongside categorizations, such as whether earnings beat or missed market expectations. We study the hypothesis that when a decision is harder, people rely more on easier-to-process signals: people still discriminate between coarse categories but distinguish less granularly within them, creating higher sensitivity around category thresholds but lower sensitivity elsewhere. Using stock market reactions to earnings announcements, we document that hard-to-value stocks are associated with a more pronounced S-shaped response pattern around category thresholds. Experiments that exogenously manipulate the problem difficulty provide supporting causal evidence in individual investor behavior. We then exploit variation in investor familiarity with earnings surprises of different sizes to show that returns exhibit greater sensitivity in regions with more historical density.

Keywords: Categorical Information; Numerical Information; Earnings Surprises; Cognitive Constraints; Behavioral Finance (search for similar items in EconPapers)
JEL-codes: D01 D83 (search for similar items in EconPapers)
Pages: 100
Date: 2025-05
New Economics Papers: this item is included in nep-cbe and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_364_2025.pdf Second version, 2025 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:364

Access Statistics for this paper

More papers in ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany Niebuhrstrasse 5, 53113 Bonn, Germany.
Bibliographic data for series maintained by ECONtribute Office ().