Question

If markets are efficient, how is it possible that market bubbles and crashes occur?

Answer 1

An efficient market indicates that any information is reflected in the security price in no time. In short, the current security price reflects all the information available about the security. However, this efficient market cannot explain the prevalence of market bubbles and crashes. The difference lies in the manner investors view the information. Because not all information is quantifiable, any information, though reflected in the current market price, is subject to investor bias. This cannot be explained through market efficiency.