What type of investor behavior is common on the short side?

The correct understanding of investor behavior on the short side involves recognizing that short sellers typically seek out overvalued stocks rather than undervalued ones. The primary objective when shorting is to profit from a decline in a security's price, which implies identifying stocks that are mispriced and poised for a decrease in value.

While some investors may indeed focus on fundamentally analyzing stocks, short sellers specifically concentrate on identifying those that they believe are overvalued and likely to underperform. This analysis often leads them to short stocks they perceive as having inflated valuations based on fundamentals, market sentiment, or trends.

Short sellers may also exhibit behaviors such as reacting to negative news or sentiment, which aligns with the option concerning overreacting to market changes. However, the goal of short selling is fundamentally different from simply seeking undervalued investments, which typically aligns with long-side strategies.

In summary, the investor behavior typical on the short side revolves around the intention to identify and capitalize on overvalued stocks, rather than undervalued ones, which correctly highlights the nature of short selling.