Which behavioral factor is a common challenge to the Efficient Market Hypothesis?

Overconfidence is often regarded as a significant behavioral factor that challenges the Efficient Market Hypothesis (EMH). The EMH posits that financial markets are "informationally efficient," meaning that asset prices reflect all available information at any given time. However, overconfidence can lead investors to overestimate their abilities, knowledge, and predictive power regarding market movements.

When investors are overly confident, they may engage in excessive trading and take on greater risks based on the belief that they can outperform the market. This behavior can contribute to market anomalies, such as bubbles and crashes, where prices deviate from their fundamental values due to irrational buying or selling. As a result, overconfidence undermines the premise of EMH, which assumes that all investors behave rationally and that no one can consistently achieve higher returns than the market through skill alone.

This contrast illustrates why overconfidence is a critical behavioral challenge to the EMH, as it leads to systematic mispricing and inefficiencies in the market, contrary to the hypothesis's assertions about rational behavior and informed trading.