Daily Show Interview with Jim Cramer

Ok, I'm going to blog about the Daily Show interview with Jim Cramer, because I hate to feel left out.

It was a great interview. But Jon Stewart didn't win. And Jim Cramer didn't lose.

We all lost, some time ago. And we continue to lose.

Some traders on Twitter seemed confused and surprised by Stewart's seriousness and anger. Granted, he generally plays an affable goofball, but it's important to remember that this isn't the first time he's opined in serious tones about failings of the media. See the Crossfire interview with Tucker Carlson on October 15, 2004 and Stewart's appearance on the O'Reilly factor.

Humor is one of the better ways to deal with anger and pain. I also had a chance to see his September 20, 2001 show intro, the first show after September 11. It's worth a watch.

But after the initial pain, after the flash of anger, it pays to go back and see if there's anything that can be learned from what happened. It's early yet, but certain lessons are emerging.

(1) There are no one-way bets.

Real estate is not a one-way bet.

The dollar is not a one-way bet.

Index funds of stocks are not a one-way bet.

Even the bears found out last week that it's not a one-way bet.

Stewart is spot-on that the only sustainable wealth-generating source is work. As a day trader of dubious ability and success, I can certainly attest to that.

(2) We have vastly overestimated our tolerance for short-term swings in the market.

I attribute this to two key components

(A) Losses are felt more keenly than gains
Prior to 2008, only (some) behavioral economists and individuals with a great deal of experience/common sense understood that we treat losses and gains asymmetrically. Kahneman and Tversky (ECTA 1979) is one of the most widely cited papers ever in Econometrica, but prospect theory remains out of the mainstream. We should know it through experience, but in most models and simulations, gains are weighted equally with losses.

Maybe these gains weren't real. But we still believed they were, and we coded our reference point to whatever our quarterly statement said. We feel poorer, and we are poorer. Psychologically, it doesn't matter if the God-honest truth was we were never rich to begin with.

(B) Our generation hasn't been tested by a real crash
As of last week, this current bear market has surpassed the dot.com crash of 2001-2002. It is also marked by a faster drop than either the 1973-1974, or 2001-2002 bear markets, and bears a disturbing resemblance to the 1929-1932 bear. See a comparison chart from Calculated Risk.

It's easier to be greedy than fearful in boom times; we've had it reasonably well. But for a generation that learned not to trust its government these last eight years, we were terribly naive in trusting professionals on Wall Street. As many commentators have pointed out, Americans are broadly, and almost uniquely, are not jealous and hateful of their elites - we seek to emulate them and replicate their success. The tide may be changing, perhaps irrevocably, but I think we'll make this mistake again.

(3) The greatest danger to stability and progress, comes not from overseas, but from the individuals whose position in society depends upon constructing "others" to govern, lead, and profit.

Remember that you owe it to yourself, your family, and those who come after us to guard against excessive power, and abuse of power. Our greatest danger comes from those who have the incentive to exploit information asymmetries, or those who profit from constructing divisions between people who, by any sane measure, have similar interests and goals.

It will ALWAYS be the case that individuals attracted to risk-seeking and profit will be attracted to jobs on Wall Street, finance, and other complicated, sophisticated, and profitable professions. That won't change. What must change is the sophistication of the rest of us. Division of labor is a marvel of modern civilization. And though Vebeln's vision of the leisure society hasn't realized itself, it will serve all of us well to devote a portion of that time thus liberated to educate ourselves on how society actually works. We may not be able to change it - individually, we certainly cannot. But we must try, collectively, to improve it. And failing that, we bear personal responsibility for at least maintaining the eternal vigilance to safeguard our individual liberty and property, if not those of the broader society.

I may write more on this later, but appreciate comments on what I have now.