Market overreactions, driven by psychological and cognitive factors, have significant economic consequences, impacting individual investors and broader financial systems. This chapter explores how emotions like fear, anxiety, greed, and euphoria contribute to market volatility, alongside cognitive biases such as confirmation and anchoring. It also examines herding behavior, the influence of authority figures, and the role of media in shaping market sentiment. Additionally, it considers neurological and physiological factors like stress and dopamine responses in investor behavior. Through case studies, the chapter illustrates these drivers' real-world impacts and offers strategies for mitigating emotional and cognitive biases. Emphasizing diversification, risk management, and regulatory measures, it provides insights for investors and policymakers to navigate and stabilize market overreactions.