The Hindu Business Line : When others bluff and double-bluff

A pack of cards may be the last thing on the mind of a serious investor. Yet, it may help to know that poker, a card game, is one of the many interests that Warren Buffett and Bill Gates share.

Though with the `poker' tag, `liar's poker' is played with the eight-digit serial number on a dollar note. It is "a bar game that combines statistical reasoning with bluffing," explains http://en.wikipedia.org. "Normally the game is played with a stack of random bills obtained from the cash register."

If that sounds perilous, stay away from Liar's Poker by Michael Lewis from Hodder. For the rest of us, the book, though not a recent publication, is a racy read about money and greed on Wall Street. "Traders are masters of the quick killing," cautions Lewis, an ex-bond trader of Salomon Brothers.

You'd meet John Meriwether in chapter 1. He was the king of the game, the liar's poker champion on the Salomon Brothers' trading floor. To him, the game had a lot in common with bond trading. "It tested a traders' character. It honed a trader's instincts. A good player made a good trader, and vice versa," explains Lewis.

How is the game played? "A group of people — as few as two, as many as ten — form a circle. Each player holds a dollar bill close to his chest." Then? "One trader begins by making `a bid'. He says, for example, `three sixes'." Which means, his guess is "that the serial numbers of the dollar bills held by all players, including himself, contain at least three sixes."

The game moves clockwise, and the next player has two options: One, he can bid higher, in terms of the number or the count, as for instance, `three sevens' or `four fives'; or two, he can `challenge'. Thus, the game goes on, with the bid escalating till "all players agree to challenge a single player's bid."

All along the players' heads keep tossing up all probabilities, such as "the statistical likelihood of there being three sixes within a batch of say, forty randomly generated serial numbers." To the great player, however, maths is the easy part. "The hard part is reading the faces of the other players," especially when they know `how to bluff and double-bluff.'

The questions that each player asks himself are, up to a point, the same questions a bond trader asks himself, observes Lewis. "Is this a smart risk? Do I feel lucky? How cunning is my opponent? Does he have any idea what he's doing, and if not, how do I exploit his ignorance? ... Is he trying to induce me to make a foolish bid?"

But the bid that came up before Meriwether, one day in 1986, was not foolish, but a dangerous one: "One hand, one million dollars, no tears." The phrase `no tears' meant, "The loser was expected to suffer a great deal of pain, but wasn't entitled to whine or moan about it." To add to the treacherousness of the game, the bidder was the boss, John Gutfreund.

What did Meriwether say? "If we're going to play for those kind of numbers, I'd rather play for real money. Ten million dollars. No tears." Gutfreund considered the counter proposal. "Meriwether was playing liar's poker before the game even started. He was bluffing," analyses the author. "Gutfreund declined. In fact, he smiled his own brand of forced smile and said, `You're crazy.' No, thought Meriwether, just very, very good."

Lewis' life begins as `investment banking analyst'. What was the job? "Analysts didn't analyse anything. They were slaves to a team of corporate financiers, the men who did the negotiations and paperwork (though not the trading and selling) of new issues of stocks and bonds," he narrates.

"Analysts photocopied, proof-read, and assembled breathtakingly dull securities documents for 90 or more hours a week... Bosses attached beepers to their favourite analysts, making it possible to call them in at all hours."

Risk was a commodity, Lewis learnt in his new job. The chapter titled `The art of war' notes: "Risk could be canned and sold like tomatoes. Different investors place different prices on risk. If you are able, as it were, to buy risk from one investor cheaply, and sell it to another investor dearly, you can make money without taking any risk yourself. And this is what we did... "

A book worth spending a Sunday afternoon with.

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