Liar's Poker Explained

Author: Enterprising Investor Forum | Posted: 07-09-2007

If you are interested in the investing world and have read some of the books or stories on the late 80s on Wall Street, you will have come across Liar’s Poker (also the title of the book written by Michael Lewis about his experience as a bond salesman at Salomon during this period).

Most people know that this is a game played on the Street but don’t really know what it is. Despite the name, it has nothing to do with Poker, as in, the card game. Apparently, people started to play this in bars to test their bluffing and mental computing skills. However, bond traders took to it as they believed that it has a lot in common with trading: you have to be rational, controlled, quick to calculate odds and stick to your strategy.

So this it how to play: a minimum of 2 or maximum of 10 people sit around and hold a single dollar bill without showing it to the other players. Ideally, each player ‘pools’ a bill and then they are randomly distributed to all the participants. The game revolves around the 8-digit serial number on the bill.

Players get a chance to ‘make a bid’ or ‘challenge the bid of another player’ and the objective is to make the highest bid for a number without it exceeding the total of times the ‘number’ is present in the serial numbers of the dollar bills held by all the players.

For example:

* the first player may ‘bid’ three 5s (this means he thinks there are at least three 5s present in all the serial numbers)

* the next player can either ‘bid’ a higher number at that level, say, three 6s, he can ‘bid’ a higher level of any number, say four 3s, or challenge the first players ‘bid’ thereby assuming there aren’t three 5s across the table.

* if your ‘bid’ is successful you win one dollar from every player but if unsuccessful you lose a dollar to all the others.

* the game ends when the ‘bid’ escalates to a level where all players agree to challenge a single player.

We hope this sheds some light on one of Wall Street’s favorite games!