I saw the entire match, even if I had my lap top on my lap and was trying to work at the same time. You got it completely right. Lajovic was by far the better player on the first three sets and lost the second by making wrong decisions and getting tight at the wrong time in the end (part of the game, I know). But he was outplaying Zverev and it was fun to see the surprise of the commentators (I was seeing it on FoxSportsAsia, american commentators, don't know who) with his play. They came up with a barrage of "backhand from the gods", "a painting of a backhand", "his backhand sings", so on and so forth. It seems they never saw the guy play and were really suprised. Actually they "explained" the fact that Zverev was being outplayed by saying that he too should be surprised with Lajovic's level.
Then came sets 4 and 5. By set 5 Lajovic was completely spent, at one time he felt a cramp while running to a ball (when the guy grabs his muscle during the point still trying to reach for the ball you know that he is not "Andy Murraying" it). Beginning of the fourth I guess it was both, he felt that he could win it and let it slip from there. In Madrid he lost to Anderson in similar conditions, so he needs to step up on this. But if you look at his last tournaments, he is only being stopped by top players (and has beaten a few) in very competitive matches, so he is surely playing above his ranking.