Geopolitical Conflict Through the Lens of Nash Equilibrium

Before beginning this blog, I should acknowledge that I do not have the ability to speak with complete confidence about the current confrontation between the U.S. and Iran (March 2026). Those who are not direct participants in the conflict cannot fully understand the deeper motives, internal calculations, and hidden tensions between the parties. For that reason, as an outside observer, I am not in a position to make definitive judgments, since much of the true structure of the conflict is neither visible nor easily knowable.

Most media reports portray the current confrontation between the U.S. and Iran as a struggle between good and evil, or as the product of the greed of a few actors. While this framing attracts attention, it is analytically weak. Consequently, individual investors influenced by such narratives may misinterpret the prospects for war and make costly financial decisions. A recurring reality is that individual investors who simply follow sensational news headlines often underperform. Markets do not price moral stories; rather, they price incentives, constraints, probabilities, and strategic responses. (Morality itself is difficult to define and often subject to debate. As Adam Smith argued, social outcomes should be judged not only by markets but also by their effects on human well-being.)

A more useful framework is Nash Equilibrium. In strategic conflict, each side chooses actions while anticipating the reactions of the other side. Outcomes are not determined by virtue or emotion alone, but by whether any player can improve its position by unilaterally changing strategy. Formally, if the United States chooses strategy $s_U$ and Iran chooses strategy $s_I$, with payoff functions $U_U(s_U,s_I)$ and $U_I(s_U,s_I)$, an equilibrium $(s_U^*,s_I^*)$ satisfies $U_U(s_U^*,s_I^*) \geq U_U(s_U,s_I^*)$ for all $s_U$, and $U_I(s_U^*,s_I^*) \geq U_I(s_U^*,s_I)$ for all $s_I$.

That means neither side can improve its position by changing strategy alone once the other side's choice is fixed. This matters because the United States and Iran are not making decisions in isolation. Each move---military signaling, sanctions, retaliation, diplomacy, proxy activation, or restraint---is chosen under expectations about the opponent's next move.

From that perspective, I believe both sides largely understood the likely final outcome of the negotiations---perhaps with greater than 90% confidence---and each attempted to extract incremental gains through limited tactical adjustments. A key asymmetry in preferences should also be noted: while one side tends to place greater emphasis on avoiding future risks, the other gives more weight to present conditions. A more realistic model must therefore include noisy and nonlinear factors, especially on the Iranian side, because power is distributed across multiple institutions and factions: elected offices, clerical authority, security organs, economic networks, ideological hardliners, pragmatists, and regional proxy relationships. We may write Iran's effective payoff as $\tilde{U}_I(s_U,s_I)=U_I(s_U,s_I)+\epsilon \Phi(s_U,s_I,\theta)$, where $\epsilon$ measures the scale of political noise, $\theta$ represents hidden internal factional variables, and $\Phi$ captures nonlinear interactions among competing institutions, ideological blocs, security networks, and proxy relationships. 

This situation is best understood as a repeated strategic game under uncertainty, domestic fragmentation, and incomplete information. While less dramatic than typical media narratives, this framework is far more useful for anticipating market behavior. As of April 2026, the negotiation space appears to have narrowed across several dimensions—sufficiently to sustain continued engagement—yet meaningful gaps remain. Crucially, the constraint is not merely the magnitude of these differences, but the limited ability of both sides to credibly commit to and publicly justify an agreement, given unresolved political, strategic, and domestic pressures. Within Iran, policy divergence between hardliners and moderates continues to delay progress, although this internal alignment could plausibly be achieved within a short horizon. In parallel, highly sensitive issues—such as Iran’s regional proxy networks—are likely to be deprioritized in the initial phase, effectively postponed to enable incremental progress. However, this sequencing introduces its own complications, particularly by elevating security concerns among Gulf states. In aggregate, intensifying economic pressure raises the probability of negotiation, but does not materially increase the likelihood of a comprehensive agreement.

P.S. I wrote this article in mid-April because many of my Korean friends were worried that the escalating tensions between the United States and Iran would develop into a major geopolitical crisis. As both sides appeared to be adopting increasingly hardline positions, some were inclined to sell their stocks amid the wave of negative news coverage. My intention was to show that investors should look beyond alarming headlines and avoid making investment decisions based solely on media-driven narratives.