This paper briefly reviews the changes from “standard” finance theory to the newer concepts of a psychologically oriented structure of decision making in asset markets. This change (a paradigm shift?) has come about based on the number and size (and frequency?) of anomalies that “standard” theory cannot explain. The objective is to suggest some areas of joint research between the field of psychology and finance that can advance the understanding of: a) what causes “bubbles” in asset markets and b) the identification of market actions that might portend a bubble forming and its subsequent collapse. This paper is by no means a finished product, but rather is looked upon as a “first cut” discussion piece to stimulate discussion and suggestions on directions and empirical testing methodologies that could advance the objective

image from wikipedia, caption follows:
Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates, from Irrational Exuberance, 2d ed.5 In the preface to this edition, Shiller warns that "the stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing 2005, in the mid-20s, far higher than the historical average. … People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes."