It's driven by the human brain : Fear | Greed
What's the causal relationship? You're suggesting the bubble causes fear, but what causes the bubble to pop?
The next step comes when people borrow money to invest in the market, because it's going up, and they can make more money that way. So now the market really starts to go up, because there's so much money pouring in. The fundamentals are completely out of view here - they're not even a distant reflection in the rear-view mirror. Everyone's making money, and nobody wants to get out, but everyone kind of has this nagging sense that the party's going to end sometime.
Eventually, the banks kind of wise up (way too late) and start limiting the amount of money they're going to lend for purposes of buying assets in this market. Then the price stops going up. Then everyone rushes for the exits, because they don't want to lose money, especially since most of the money is borrowed. But everybody can't be one of the first ones out the exit, and so a bunch of people lose money.
Borrowed money. Money they can't pay back.
Now the banks are in trouble, because they've made a bunch of loans that people can't pay back. That's how a bubble can hurt the larger economy.
As I recall this has been experimentally verified but I can't remember enough to find a citation.
Unfortunately because even the micro phenomena are complex and difficult to quantify, you can't reliably use micro knowledge to mathematically predict macro phenomena the way you could in something like physics.
Since the economics that most non-economists really care about are all macro stuff, this tends to mean that people are not really aware of experimental econ. It's still useful in cases like this, though: You can't experimentally confirm the actual causes of boom and bust cycles, for instance, but you can show that certain conditions are sufficient for the emergence of boom and bust cycles.
too much fear / too much greed