This study explores the psychological mechanisms driving market fluctuations, focusing on how cognitive biases, such as investor sentiment, confirmation bias, risk perception, and the anchoring effect, contribute to market overreaction. By analyzing the interplay between these biases, the research challenges traditional financial theories like the Efficient Market Hypothesis (EMH) and highlights the behavioral influences that lead to excessive market volatility. The findings suggest that investor psychology plays a critical role in market inefficiencies, with emotions such as fear and greed leading to irrational decision-making. The study emphasizes the need for regulatory measures and investor education to mitigate the impact of these biases, ensuring more stable financial markets.