DEFINITION of 'Liar's Poker'

"Liar's Poker" is a game often associated with Wall Street traders who use statistical reasoning and behavioral psychology tactics to gamble. Liar's Poker is fairly similar to the card game "cheat." Players hold random dollar bills with close attention to the serial numbers on their respective bills. The objective of the game is to bluff the opponents into believing that your bid does not exceed the combined sum of all of the serial numbers.

Liar's Poker is also book by Michael Lewis that depicts the Wall Street bond trading culture at Salomon Brother's. Though the author has commented that he intended the book to be a cautionary warning about behavior and practices he found to be questionable and deceptive, he admits that some individuals have used the book as a blueprint to seek personal profit.

BREAKING DOWN 'Liar's Poker'

In Liar's Poker, if one player bids three 4s, he predicts that within all of the dollar serial numbers held by all players, there are at least three 4s. If the player's bluff is not called, the next player must either bid a higher frequency of any other digit (five 2s) or can bid a higher number at the same frequency level (three 6s).

Strategies of Liar's Poker

The number of players in the game can affect the probability of winning, though the game itself largely rewards and benefits those who employ deception and trickery to win. Rather than merely bid as accurately as possible, the players are taking turns at coaxing their rivals to make a mistake as they play. Under the rules that require bids to continue escalating, the stakes of the game increase as well. With more than two players, it is a frequent strategy to continue to raise the bid given the likelihood of being challenged and the related likelihood of losing when challenging. Such a strategy is built on the basis that it is better to continue to bluff in the hopes of potentially winning than to challenge and lose.

The game is comparable to "Liar’s Dice," a game where players roll dice, hide the numbers they have rolled, and then make bids on the total number of dice they believed were rolled by all players with that face value. Here again, the players bid and bluff until challenged by another player.

Typically if a player poses a challenge in Liar's Poker and is incorrect, they must pay the player they challenged. If the player who was challenged was found to be incorrect, then they must pay every player who posed a challenged. Usually the payout is one dollar but that may be increased depending on the agreed upon rules.

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