Kahneman and Tversky introduced the availability heuristic in their 1973 paper in Cognitive Psychology. Their insight was deceptively simple: people estimate the probability of an event based on how easily examples of it come to mind. Events that are vivid, recent, emotionally charged, or heavily covered in media feel more probable than they are. In normal times, this cognitive shortcut is merely a source of mild miscalibration. In a geopolitical crisis with saturation media coverage, it becomes the dominant driver of retail investment decisions.
The Iran war has produced a near-continuous stream of dramatic coverage since late February, including Strait of Hormuz closures, naval exchanges, energy infrastructure strikes, ceasefire violations, and daily oil price swings, creating precisely the conditions in which the availability heuristic operates at maximum intensity. The result is the most clearly measurable divergence between investor sentiment and market performance in recent memory.
The Gap Between Perceived Risk and Portfolio Reality
The single most instructive data point in the current environment is the gap between how retail investors feel and what markets have actually done. Since March 30, the S&P 500 has risen 13%. As of May 8, it closed at 7,399, a new all-time high, after six consecutive weeks of gains. Q1 2026 earnings season has delivered an 84% EPS beat rate, the highest since Q2 2021, with blended revenue growth of 11.1%. The fundamental case for U.S. equities is, by any earnings-based measure, strong.
University of Michigan consumer sentiment in early May hit a new low. The divergence between sentiment and actual market performance is not a coincidence. It is the availability heuristic in operation at scale. The daily flow of geopolitical news is feeding a mental model of risk that is systematically disconnected from the portfolio reality facing a broadly diversified long-term investor.
Why the Advisor Who Understands This Is Positioned Differently
Barber and Odean's landmark 2000 study documented the performance cost of news-driven trading with precision. Individual investors who traded most actively earned net annualized returns of 11.4% compared to 16.4% for the market. The roughly 5 percentage point gap was not explained by poor stock selection. It was explained by the timing and frequency of trades, driven by cognitive patterns including the availability heuristic.
That pattern is more intense today because the news environment is more intense. Social media, financial news apps, and 24-hour coverage of the Iran war create a more saturated information environment than any prior geopolitical crisis. The cognitive effect is proportionally larger.
Richard Thaler's work on mental accounting adds a further layer. Clients who framed the war-driven February-March drawdown as a loss in their accounts are experiencing the loss aversion Kahneman and Tversky documented: losses feel approximately twice as intensely as equivalent gains. For a client who sold during the drawdown and is watching the recovery from cash, the psychological response is corrosive: they are experiencing both the original loss and the pain of the missed recovery simultaneously. This compounded distress is the specific emotional environment in which a second poor decision becomes most likely. This is the moment where the advisor who understands the mechanism can prevent the most damage.