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7:25 am - Tuesday October 22, 2019

How does it feel like to lose over $50B?

| Economics | Rating: 4.5
by Numan

UBS shareholders have written off over $50B in the last couple of months. I can’t help but wonder how does that feel like? American companies are writing off hundreds of billions of dollar in subprime and alt-a mortgages. Housing prices continue to drop and on average each American citizen has lost more than we want to count (tens of thousands of dollars at the least).

Why do most of our lives seem to go on relatively unaffected? I believe there are 4 basic reasons for this phenomenon:

#1 Concentration of wealth results in concentration of lose as well
O n average the numbers point to almost 80% of the wealth in the US being held by 10% of families in (yet another interesting reference for the 80-20 principle). Naturally, when this is the case 90% of the families don’t take part in either capital gains or losses on that wealth. It appears our part in the greater financial scheme of things is less significant than we had hoped it would be.

#2 The loss is not tangible
Imagine losing 50$ you had in your hand a minute ago and compare that to 0.05% yearly return you could have received on your IRA in another alternative. Which hurts more? With all our sophistication and modern life style our psychology gets the better of us. Tangible losses are easy to grasp and to regret.

#3 Everybody lost
Always comforting but not really helpful is the fact everyone shares our losses. It’s comforting to know we weren’t the only ‘fools’ around. However, when it comes to the bottom line a loss is a loss.

#4 We’re lucky our homes aren’t traded on a house exchange
Imagine your house taking a 20% dive in afternoon market trading. Imagine we had a market price available at all times for our most expansive asset. I would certainly lose sleep over it. I guess ignorance really is bliss sometimes. I’ve written more on this important issue (“A Case of Too Much Information”).

An interesting time line and evolution of the subprime crisis can be found at BBC news here under “Timeline: Sub-prime losses”.

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