When the Strait of Hormuz effectively closed in early March 2026 and WTI crude crossed $90 per barrel within days of the conflict's escalation, something predictable happened in retail brokerage accounts across Canada. Investors sold. They sold into the shock, at the moment of maximum uncertainty, into prices that, with the benefit of three months of hindsight, now look like the best entry points of the year.
The S&P/TSX Composite closed at 35,169 on June 2, up 1.25% on the session and approximately 10% above the intraday lows recorded during the worst of the March selloff. Investors who held through the shock are, as of today, whole and then some. Investors who sold near the bottom are in cash watching that recovery from the outside, and many of them are not coming back in because of a second cognitive distortion that is almost as costly as the first.
The Mechanism Kahneman and Tversky Identified in 1979
Loss aversion is not irrational behaviour. It is the brain's evolved response to threat, operating on a financial signal it was never designed to process. In their foundational 1979 paper in Econometrica, Daniel Kahneman and Amos Tversky demonstrated that losses feel approximately twice as painful as equivalent gains feel satisfying. The asymmetry is not a quirk: it is a structural feature of how humans evaluate outcomes under uncertainty.
Applied to portfolio behaviour during the Hormuz shock, the mechanism produced exactly the pattern prospect theory predicts. When the TSX fell 8% in the weeks following the conflict's escalation, the emotional signal was not "my portfolio is worth 8% less." It was "I am losing, and losses are twice as bad as gains are good, so this feels like a 16% loss in emotional terms." That is what drove selling. The math was wrong. The feeling was exactly what Kahneman and Tversky would have predicted.
The chart below traces the TSX Composite from January 2026 through June 2, with the March shock, the April ceasefire-driven rally, and the current level marked. The gap between where the selling happened and where the index sits today is the quantified cost of loss aversion in this particular episode.
The TSX Composite's 2026 trajectory in weekly closes, with the March panic zone shaded and the April 8 ceasefire marker labelled. The index recovered approximately 3,400 points from its March 9 intraday low to the June 2 close, a gain that accrued entirely to investors who did not exit.
The Re-Entry Problem Is Now the Story
Three months after the initial panic, loss aversion has morphed into a second and equally powerful distortion. An investor who sold at 31,500 in mid-March and watches the TSX trade at 35,169 faces a mathematically simple but psychologically excruciating calculation: re-entering the market now means buying back at a price roughly 11% above where they sold. That gap, not uncertainty about the market's future direction, is the primary obstacle to re-entry.
This is regret aversion, the close cousin of loss aversion that Kahneman and Tversky's framework also predicts. The investor does not frame the choice as "should I hold cash yielding 3.5% or own equities with expected long-term returns of 7%?" They frame it as "should I lock in the pain of having sold at the wrong price?" The answer, consistently, is to keep avoiding the decision rather than make it. The cash position persists not because the investor has formed a view on markets, but because making a decision would require confronting the earlier mistake.
What the Inflation Data Does to This Calculus
The monetary policy dimension of March's fear narrative has also quietly collapsed. The logic that justified selling in March went roughly as follows: oil prices are surging, that will push Canadian inflation above the Bank of Canada's 3% upper band, the BoC will be forced to hike, higher rates will compress equity valuations, therefore sell. Each link in that chain contained some validity. What has emerged since is that core inflation in Canada came in at 2.1% year-over-year in April, according to Statistics Canada, even as headline CPI reached 2.8% on the back of gasoline prices rising 28.6% year-over-year. The BoC's preferred core measures showed that the energy shock was not bleeding into underlying price pressures. TD Economics noted in their April CPI commentary that there was "little argument yet for Bank of Canada rate hikes," and bond markets currently price only a 3 to 5% probability of a June 10 hike.
The monetary policy amplifier that made March's fear feel like a coherent thesis has not materialized. The investor who sold partly on the basis of that thesis now holds cash for reasons that have been substantially invalidated by subsequent data, but the psychological mechanism keeping them in cash has nothing to do with data at this point. It is pure regret aversion.