This NYT article, "Economists Try To Explain Why Bubbles Happen" gives a pretty good explanation for some of the major theories why we have bubbles:
- The reluctance of sophisticated investors (like mutual funds) to short sell for fear of offending clients
- The willingness to buy into a bubble if you think the bubble is going to continue to grow for a while. This is also known in real estate as the "greater fool" approach (you don't mind buying an overpriced asset if you can find an even bigger fool to sell it to in the future).
- Regulatory frictions
Click here for the whole article.