Heh, even then there is room for AI psychosis. I have seen a German theater HQ on AI control orders more than 3/4 of its total ground troops to leave their AO in the Caucasus region in Turkey and march west then north trying to go all the way around the flippin'' Black Sea so that they could attack the enemy from the north. In effect they turned a 200km approach march into a 2000km (or so) flanking maneuver. It was possibly the single most absurd thing I have ever seen the AI do. And it was not only repeatable; it took a fair bit of experimentation to figure out how to tweak the AI's objectives and theater boundaries to make it NOT do that every single time. While I do grant that the theater AI has fewer such crazy hangups that the lower HQ levels, when it does do something crazy the nutty effects are hugely magnified.
Oh, yes, I've seen this bad behavior, but it is greatly reduced in TFH. Plus, you have to take care to prevent these problems before they occur; i.e., you have to straight-jacket the theater AI well in advance of letting it out on the streets by itself.