Agree with everyone about acting professional, putting on a "happy" face and documenting everything.

Keep in mind that there may be something going on that you don't know about, e.g. some sort of office politics. You may have supporters that you don't know about who got shot down in favor of someone's cousin or something. If you don't behave well, your hidden supporters may end up in a worse position politically.

But nothing says you can't look for and take a better job at another employer...In some tech areas, I'm told that job hopping from company to company is considered normal, even valued, and that the old style "company man" is looked down on as a guy who can't or won't get another job (e.g. "no ambition").

Only you can judge the politics, but stay cool and professional and do a good job.

Best of luck.

OK, I made a joke reply before, now a serious one.

There's no career ladder anymore, the way most of us move up is to move over to another company. The time to do this isn't always when you WANT to, but if you want to "move up" then the next rung is usually on another company ladder.

Now that said...do you really want to move up?

The firm I work for is very much like a law firm - in fact there are "Partners" and then there are "Directors" who are a level below that. The Partners are guys I respect, a lot. They are competent and fair, and they work hard - in fact, they work harder than any employee, and make more sacrifices and put in longer hours that I do. So do I want to be a "Partner"? No, not at all. It's not all money and power, there's more to work than that. So that's something to think about - staying put might be a good choice when you look at the options going up takes from you.

Just because the other guy got the job doesn't automatically mean that you were a bad candidate.

I have learned that superior job-specific skills and time in position don't always correlate to getting the job.

There are just so many other reasons that could be in the mix here, many of which the boss could never admit to.

Do the boss and the new guy have anything in common? Maybe, their children go to the same school? Maybe, they met at a racquetball court. Culinary school.

So, maybe, you will get the job next time. I'd be updating my resume and looking for another job also (just in case), but don't mess up the next opportunity with your current employer.

By the way, sometimes our feelings have a way of carrying on our face without us realizing it. You will need to pay very close attention to how others are perceiving your new role. Don't let the cat out of the bag.