Which error leads investors to systematically underreact or overreact to market information?

The Belief Inertia phenomenon is a cognitive bias that causes individuals to cling to their pre-existing beliefs even in the face of new evidence or information. Investors influenced by this bias may resist adjusting their portfolios or investment strategies based on fresh market developments, leading to systematic underreaction to new information.

In financial markets, this inertia can cause price adjustments to occur more slowly than they should, as investors are often hesitant to modify their views. This tendency to stick with existing beliefs can result in missed opportunities or continued investment in underperforming assets since they do not integrate new data promptly.

The other options address different concepts. Conservatism Bias relates to the tendency to be overly cautious and slow to update beliefs. The BSV Hypothesis pertains to behavioral finance but focuses on model aspects rather than direct investor reactions to information. A Negative Feedback Loop typically describes a situation where, in response to price declines, investors sell, prompting further declines, which is more about market reactions than beliefs. Belief Inertia specifically captures the issue of how prior beliefs can lead to systematic errors in how information is processed, making it the most appropriate choice for this question.