Error: This item is not directly editable in Photoshop

Copying and pasting assets from other Adobe applications by default creates a Smart Object that is linked to Libraries.
When trying to edit library-linked assets in Photoshop, you receive the following message:

• This item isn't directly editable in Photoshop, but it can be placed in a document. To place the item, drag it into an open document.

To edit the asset, open the application in which the asset was created and double-click the asset within the Libraries panel. For example, if the asset was created in Illustrator, open Illustrator and double-click the asset in the Libraries panel to edit it and then return to Photoshop to see the asset updated in your document.

Alternatively, if you don't want the asset linked in your Libraries panel, you can deselect the Add To My Current Library option in the Paste dialog within Photoshop. Doing this step embeds the asset into your document instead of linking it in your Libraries panel or updating other documents containing this asset.