Why has a new tech mania grabbed hold of the market so soon after the last implosion? Psychologists have an unsettling explanation for the phenomenon.

An entire academic field, going by the daunting name of affect, has arisen to explain the role of emotion in investments. This theory rests on research done by dozens of internationally respected psychologists such as the University of Oregon's Paul Slovic and Princeton's Daniel Kahneman, a 2002 Nobel Prize winner in economics.

Affect theory shows that we all have our likes or dislikes, ranging from where we want to vacation, to the type of people we like to associate with, to the kind of stocks we want to buy. The more we like something, the more easily we are swayed to believe the object of our affection is without flaw. There is such a thing as falling in love with a stock.

That's why the late-1990s technology breakthroughs made investors believe (many still do) that we were on the cusp of a technological upheaval to match the harnessing of electricity. The outcome would be supernatural profit levels. Thus were rationalized all those insane price/earnings ratios (or for the many companies with no earnings, price/sales ratios).

Here are four investor mistakes, as interpreted by the affect theorists. Make yourself aware of them and do not make them.

•Ignoring the odds. Investors' willingness to buy a stock they strongly believe in is similar whether the odds of success are 1 in 10,000 or 1 in 10 million, says Carnegie Mellon's George Loewenstein in a 2001 study. Other studies show that such blindness to long odds can make investors drive up an exciting stock to as much as 100 times its fundamental value.

•Expecting current trends to persist. When your newly issued stock doubles in price right away, you expect this phenomenon to continue indefinitely. This belief allows investors to pay sky-high prices for a hot stock, making for a self-reinforcing fantasy.

•Buying rosy forecasts, ignoring everything else. When revenues are projected to expand like a chain reaction into the future, investors get caught up in the excitement and overlook any warning signs. New York University's Yaacov Trope and his colleagues call this phenomenon temporal construal. One example is how people in 1999 pushed AOL up to a price that an earnings discount model indicated would be justified only if it had 18 billion subscribers, triple the population of the Earth.

•Letting popularity distort risk perception. As Slovic and Carnegie Mellon's Baruch Fischoff explain in a classic 1978 paper, people underestimate the risks of things they like, such as tobacco, bicycles, favorite stocks. They overestimate the risks of things they don't like--nuclear power, for example. This distortion helps to explain why both professional and individual investors were sanguine four years ago about stocks made risky by their never-never-land P/E ratios. These findings on mental aberrations also undermine the central tenet of efficient market theory, which is that prices are rational reflections of all available knowledge.

How do you escape these pitfalls? Find something solid to put your money into: value stocks with time-tested strengths. You will know them by the sound fundamentals and the absence of any swell of excited voices...