Strategies for Liar's Poker

Question

This question is only tangentially related to quantitative finance. Scott Patterson's book The Quants describes how a quant at Kidder Peabody figured out a strategy to playing Liar's Poker in the late 80s. This strategy spread among quants at investment banks and led to it not being played any more.

Here is a simple description of the basics of the game for those not familiar: http://www.investopedia.com/terms/l/liars-poker.asp#axzz27gZIYnwx

The strategy described in Patterson's book was more or less to use the information from your own bill to have more confidence in making large bets. For instance, if you have two 3s on your bill when the previous bid was four 9s, then rather than bid five 3s you should bid 10 or more 3s (when there were 10 players). How much you should increase your bet in the strategy was likely based on Bayesian reasoning, though the book does not go into that much detail.

Is this really the best strategy or only the best strategy under some conditions?

Answer 1

The strategy was discussed in the book "The Poker Face of Wall Street" by Aaron Brown (p258-267). Let's say that $20 bills are put into a hat and then drawn randomly. The serial number on the bill becomes your "hand." According to Brown the key to the game was the position of the betters. The hierarchy determined the betting order. So, the senior people bet first and junior traders always bet last. This was a disadvantage for the juniors if they played a naive strategy. What Brown discovered was a system that didn't require cooperation between people but escalated the bids very quickly thus jamming the early bidders when the betting came back around to them.

As an aside, I liked Brown's book. It's a quick, fun read. He seems like an interesting guy who'd kill me at poker.