Washington, DC - It would be naive to assume that Undersecretary of State William Burns' presence at the recent EU-Iran nuclear talks has opened the door to a rapid improvement in US-Iranian relations, or that the US administration has abandoned its military option. But this recent tilt towards diplomacy offers a pause in which to take note of the unsung economic and political costs of hyped-up rhetoric.

Our lack of understanding of regional dynamics – particularly in the Gulf – is losing us significant new commercial opportunities; a reluctance to engage is preventing us from acquiring the information needed to fight against extremism in the region.

Stereotypes have some basis in past experience, whether positive or negative. Over the last 30 years, the American public's clearest memories of our involvement in the Middle East relate to gruesome acts of violence and oil prices far more than to any of the more positive aspects. The 1983 bombing of the US barracks in Lebanon, Pan Am-Lockerbie and endless violence in Iraq and Lebanon – this is the stuff of headlines, not the successful bilateral trade agreements or the widespread emulation of aspects of American culture. The result: increasingly angry and uncompromising "us against them" rhetoric, heard in such slogans as "war on terror" and "clash of civilisations".

Once imbedded in the national psyche, negative rhetoric tends to feed on itself, ultimately leading us either to exaggerate or minimise individual countries' aspirations and their capabilities to affect us. Thus, President Ronald Reagan's repeated characterisation of Mu'ammar Qaddafi as the "Mad Dog of the Middle East", rather than diminishing Libya's influence, afforded it an unlikely stature.

We have yet to grasp that the recent experience of small Gulf Arab states allows them to project wealth and experience in excess of their size, and beyond their borders. Thus we see Qatar mediating the Arab-Israeli conflict, and Dubai changing the fortunes of countries like Djibouti and Senegal.

American attitudes towards the Middle East are affecting our ability to attract investment from the region at a time when we need it most. Since 9/11, resentful of being limited to inconsequential shares, and labelled "terrorist money", Saudi investors have scaled back US purchases and repatriated a good fraction of existing investments. Receiving a lukewarm response from US banks, the Libyan Investment Authority – steward for a $50 billion sovereign wealth fund (a state-run investment vehicle, typically associated with oil-producing economies) – chose to make London its western base.

Increasingly stringent visa requirements persuade a large number of Middle Eastern students to go elsewhere. In this last case, we lose doubly, for those who do not experience an American education are not available in the future as a source of goodwill. Many large US companies are still hesitant to deal with the Middle East, while European companies profit from the commercial openings we helped create.

Administration officials have repeatedly said that we must take Iran at its word, referring principally to its desire to "wipe Israel off the map". In repeatedly seizing on the words of the Iranian president, and ignoring the views of other Iranian personalities, we miss the degree to which Iran's failing economy is seen by other officials and its own citizens as the greatest problem of their regime.

The fact that we have to rely almost solely on what Iran says publicly is a sign that we don't know enough about that country to understand the ways to which its main actors employ rhetoric.

Furthermore, we have a hard time understanding why our language doesn't persuade others to join us because we do not fully appreciate the constraints our friends and allies face. US policy towards Iran troubles many Gulf States for two reasons: they are heavily linked to Iran by trade, and they know that if the United States attacks Iran, their ties to the United States could make them convenient targets for Iranian missiles.

In order to seek international solutions to the current standoff with Iran, we must work harder to understand Iran's inner workings, which have thus far eluded us. We have indicated our interest in opening an "Interests Section" in Tehran, and Iranians have said they may be open to increased education and cultural exchanges – all positive steps. Training a large cadre of analysts in Iranian politics, language and history would also go far.

Only through a conscious effort to monitor language and acquire new knowledge can we hope to reverse the effects of decades of hyperbole, and be ready to face both threats and opportunities with open eyes.