Markets this morning are doing what they always do when a geopolitical shock appears to ease: they are pricing the best case. Oil is down sharply on reports that Washington and Tehran are close to a one-page memorandum of understanding, equity futures are near record highs, and investors who have been cautious since February are being tested. The test is not panic. It is optimism, and optimism is harder to manage.
Understanding what is actually driving investor behaviour this morning requires separating the market signal from the narrative. The narrative says the war is almost over. The signal says a framework is being discussed, major disagreements remain unresolved, and the Strait of Hormuz is still not fully open.
The Anatomy of the False Resolution
Behavioural finance research identifies a consistent pattern around geopolitical escalation and de-escalation: investors systematically overreact in both directions. The panic on the way down is well-documented. The overconfidence on the way up receives less attention, but it is equally costly.
The mechanism works as follows. During a period of sustained uncertainty, cautious investors hold elevated cash, reduce equity exposure, or simply stay frozen. When a resolution appears, several forces operate simultaneously: the fear of missing a rally activates FOMO (fear of missing out), the relief of clarity reduces perceived risk, and rising prices feel like confirmation that the worst is behind us. This combination pushes investors to buy into a rally precisely when the fundamental picture has not yet been confirmed.
This morning's oil move fits the pattern precisely. Brent crude has retreated from its peak above $115/barrel toward $98, a significant move that markets are interpreting as evidence that the war premium is unwinding. But the math matters here: oil is still roughly $25 above its pre-war level of approximately $73. A partial de-escalation is not a resolution, and the "war premium" has not disappeared. It has compressed.
What the Research Says About These Moments
Studies of investor behaviour during geopolitical cycles consistently find that the highest rate of regret decisions occurs not during the initial shock, but during periods of apparent recovery. Daniel Kahneman's research on the distinction between "experiencing self" and "remembering self" is directly applicable: investors experiencing rising markets feel confident; the remembering self, looking back after a failed peace process, recalls only the loss from buying high.
The Iran situation carries specific features that amplify this risk. The April 12 Islamabad talks produced 21 hours of negotiations and no agreement, with Vice President Vance describing Iran as "unyielding" on nuclear issues. The current one-page framework represents a narrower, more preliminary stage of the same process. Trump himself has simultaneously signalled openness to a deal and warned that military strikes could resume "at a much higher level and intensity" if talks fail. Both things can be simultaneously true, and often are in early-stage diplomatic processes.
For investors watching oil prices this morning, the relevant question is not whether the market's optimism is warranted. It may well be. The question is whether any current portfolio positioning is driven by the price signal or by a genuine reassessment of the underlying fundamental risk. If the answer is the price signal, the positioning decision is behavioural, not analytical.
The Discipline Asymmetry
One of the less-discussed findings in behavioural finance is what researchers call the "discipline asymmetry": investors who maintain their process during downturns frequently abandon it during apparent recoveries. The logic is intuitive. Discipline during a crisis feels like virtue. Discipline during a rally feels like leaving money on the table.
A balanced portfolio built to withstand a geopolitical shock is also built to participate in the recovery when it comes. That recovery participation does not require active repositioning. It is the design of the portfolio working as intended. The error occurs when investors treat an apparent resolution as a signal to increase risk exposure, only to discover that the resolution was premature.