Investing in sentiment

Even actions like raising tariffs on exports by an increasingly isolationist economy can quicken the pulse of the global economy.

- ANTONIO SAMSON

Is local market sentiment affected? Even if the Philippines may have a comparatively tiny export ($16 billion) to the biggest economy in the world, the aftershocks of this global earthquake can reach its shores. Sentiment can rule market behavior.

Sentiment, deemed as an irrational element in an otherwise exact science, has nonetheless determined economic behavior. Adam Smith himself, who lived in the eighteenth century, though famous for his "Wealth of Nations" (the abbreviated title) and the theory of the "invisible hand," wrote another book "The Theory of Moral Sentiment" that delved into the psychological explanations of man's actions, including his economic ones.

Was Adam Smith the first behavioral economist?

More contemporary behavioral economists, like Richard Thaler, cite irrational behavior in investment decisions. For instance, using a ticket to an event, even if one is feeling sick or inconvenient to go due to bad weather, so as not to waste the cost of the ticket, is economically an unsound decision. The theory of "sunk cost" states that money spent and no longer refundable becomes an irrelevant issue in any rational decision.