Economists realised long ago that if all investors were rational, it would be difficult for speculation to exist. So to get speculation, you typically need for the rational investors to be beset by herds of irrational investors. These are called "noise traders," but you can think of them as a zombie horde, screaming, "Buy, buy, buy!" or "Sell, sell, sell!" Sometimes, as in a zombie movie, it makes sense to stand and fight the zombies, but if you're faced with a big enough horde, it makes sense to turn and run. In the same way, economists have shown how irrational "noise traders" can overwhelm rational traders, forcing rational people to buy into the bubble instead of trading against it. Since a large portion of Chinese stocks are held by individual investors, it seems possible that irrationality has gripped that market.

A second, closely related theory for what causes bubbles is herd behavior. Imagine if you were sitting in a cafe and suddenly everyone got up and ran for the exits. Would you follow them, or would you try to figure out why everyone was running? Most people would dart. After all, you don't want to be the last person out the door, because you might be eaten by the mountain lion that just walked in.

So herd behavior can be rational. In asset markets, this means that when stock prices suddenly rise, some people believe they rose for a reason and that others are clued into this reason. More people then pile in, causing the price to rise further and yet more buyers to jump in. In other words, people start running for the door when there is no mountain lion. Chinese people may have bought into the markets simply because everyone else was doing it.

A third theory relies on the way that humans use the past to predict the future. Sometimes people may interpret price movements as "trends" that can be expected to continue. That's called "extrapolative expectations." If you've ever seen finance journalists draw big colored arrows on stock charts, you know how easy it is to make this kind of inference.