OBJECTIVE: Historically, much of the stigma research has relied on a language of attributes, using survey methodology for assessment, and the consumers' perspectives on stigma are also inadequate, hindering an in-depth understanding of social processes related to stigma. Thus, this study aims to understand the social processes guiding experiences of stigma among adults with serious mental illness. METHODS: Ethnographic methodology was employed to collect data for this study. Methods included interviews and participant observation. Participants included adults with serious mental illness (n = 18) and mental healthcare providers (n = 16), along with policy stakeholders/experts (n = 7). Data analysis was conducted via open and focused coding along with analytic interpretation. RESULTS: A social process guiding experiences of stigma, termed as the principle of gradient rationality (PoGR), is proposed. Three components to the principle are: 1) categorization via stigma or status symbols, 2) movement within hierarchy via exchange of social capital, and 3) institutionalization of stigma via interactional stigma. Briefly, the principle suggests that, during an interaction, individuals can be placed in a hierarchy of three roles/categories ("unreasonable," "high-functioning," or "normal") based on their measure of non-normative behavior. The lower one's position in the hierarchy, the more likely one is to experience stigma. Findings can help develop stigma measures that are sensitive to the variability of individuals experiencing mental illness and to the variability of stigma experiences on a personal/contextual level. Research in other settings is required to further study the applicability of this principle across contexts.