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: Real-world news environments comprise both granular quantitative information and coarse categorizations. For instance, company earnings are reported as a dollar figure alongside categorizations, such as whether earnings beat or missed market expectations. When processing capacity is limited, these components may compete for attention. We study the hypothesis that more severe processing constraints increase the relative reliance on coarser signals: people still discriminate between categories but distinguish less granularly within them, creating higher sensitivity around category thresholds but lower sensitivity elsewhere. Using stock market reactions to earnings announcements as our empirical setting, we document that hard-to-value stocks are associated with a more pronounced S-shaped response pattern around category thresholds. Naturalistic experiments that exogenously manipulate processing constraints provide supporting causal evidence in individual investor behavior. We then study two determinants of processing constraints in the field. First, more common sizes of surprise may be processed more precisely. Indeed, regions with more historical mass exhibit far higher return sensitivity. Second, a surprise about the category realization may capture attention, leaving less capacity to process the numerical signal. We find that category surprises, e.g., a profit when a loss was expected, are associated with diminished sensitivity to numerical earnings information.

Keywords: Categories; Numbers; Processing Constraints; Earnings News (search for similar items in EconPapers)
JEL-codes: D01 D83 (search for similar items in EconPapers)
Pages: 105 pages
Date: 2025-05
New Economics Papers: this item is included in nep-cbe and nep-exp
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_364_2025.pdf First 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 ().