This bubble was based on the speculation of the new technological development due to the emergence of aviation, automobiles ratio and electrical power grids and the emergence of e-commerce and internet. The nature of the dot-com bubble is based on the greater fool theory as the majority of the people invested in the hopes that the overvalued prices will continue to rise without investigating the shares and relying only on the prices. Another recent example of such stock market bubble is the Stock market crash of 2008.
Financial theory: As per the efficient market hypothesis, the markets are rational in nature and the stock prices reflect the information that is available. The prices of the security subsequently changes as per the new information present. However, the behavioural finance suggests that this efficient market does not explain the various anomalies observed in the market. It is suggested by behavioural finance that the anomalies of market are abnormality and unusual occurrence within the smooth stock market pattern.
The paradigm of efficient market hypothesis suggested that market with large numbers of rational individual for profit maximization often competes actively with one another and attempts to predict the future market values of the various securities, and this theory suggest that the essential information is freely available to the investors.