Market bubbles such as the technology bubble of the 1990s and the housing bubble of 2004-2007 are best explained by
A)the efficient market hypothesis.
B)behavioral finance and economics.
C)rational expectations theory.
D)anomaly theory.

Question

Quizplus · Accepted Answer

Market bubbles are usually driven by irrational and emotional behavior of investors, such as herd mentality and overconfidence, which are best explained by behavioral finance and economics. The efficient market hypothesis and rational expectations theory assume that all investors are rational and markets always reflect all available information, which is not always the case with bubbles. Anomaly theory focuses on observing market anomalies and exploiting them for profit, rather than explaining why a bubble occurred in the first place.

Market Bubbles Such as the Technology Bubble of the 1990s