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 their own bill serial number. 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.

  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s ...
  2. Bid Tick

    An indication of whether the latest bid price is higher, lower ...
  3. Best Bid

    The highest quoted bid for a particular trading instrument among ...
  4. Centipede Game

    An extensive-form game in game theory in which two players alternately ...
  5. Hit The Bid

    Hit the bid is a buzzword used to describe an event where a broker ...
  6. Bid Whacker

    A slang term for an investor who sells shares at or below the ...
Related Articles
  1. Investing

    The Worst Bets You Can Make At The Casino

    We break down the odds associated with casino games. Which game do you think offers the best chance at winning?
  2. Insights

    Can Games Make You A Better Investor?

    As investing is a great example of an activity that draws on a wide range of mental and emotional skills, it is worth exploring how to improve this skill set.
  3. Insights

    Advanced Game Theory Strategies For Decision-Making

    The importance of game theory to modern analysis and decision-making can be gauged by the fact that since 1970, as many as 12 leading economists and scientists have been awarded the Nobel Prize ...
  4. Insights

    The Rise Of Labor Unions In Pro Sports

    Most of today's pro athletes enjoy the perks that come with union membership - but this wasn't always the case.
  5. Investing

    Going All-In: Comparing Investing And Gambling

    People often compare stocks to gambling, but how close are they really?
  6. Tech

    How To Game The Video Game Industry

    Investopedia explores the business, current developments, future trends of video games industry and how the overall industry makes money.
  7. Investing

    Game Theory: Beyond the Basics

    Take your game theory knowledge to the next level by learning about the Nash Equilibrium.
  8. Retirement

    Top Pro Athlete Pension Plans

    Not all pension plans in professional sports are created equal.
  9. Investing

    Create a Monte Carlo Simulation Using Excel

    How to apply the Monte Carlo Simulation principles to a game of dice using Microsoft Excel.
  10. Tech

    How The Video Game Industry Is Changing

    Video game creation has become increasingly complex, and the cost of creating a game to run on one of the major consoles has risen with this greater complexity.
  1. What taxes are due on money won gambling in Las Vegas?

    Travel to Vegas and try to win big at the casino. But before you do, make sure you understand the tax laws that govern gambling ... Read Answer >>
  2. How do day traders capture profits from the difference between bid and ask prices?

    Discover how day traders capture profits from the difference between bid and ask spreads. These spreads blow out during volatile ... Read Answer >>
  3. Why is game theory useful in business?

    Once hailed as a revolutionary interdisciplinary phenomenon, game theory is actually applicable in today's business world. ... Read Answer >>
  4. Why are the bid prices of T-bills higher than the ask prices? Aren't bids supposed ...

    Yes, you are correct that the ask price of a security should typically be higher than the bid price. This is because people ... Read Answer >>
  5. What are the most common issues with Serial Correlation in stocks?

    Read about the concept of serial correlation in stock returns, and learn why market analysts are divided about the efficacy ... Read Answer >>
  6. What are common examples of Serial Correlation in finance?

    Take a deeper look at serial correlation in finance, and find out why most attempts at discovering serial correlation among ... Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center