Destroy the Game

I set out to bust Liar's Poker. Not to beat it by winning a lot of money, but to destroy it as an institution. It offended my egalitarian poker principles, and it was being used to repress my friends. Killing it would not only remove an obstacle to advancement for quants, it would prove to traders that mathematicians could beat them at their own game. I put together a computer bulletin board group composed of quants who wanted to be traders-who wrote down all the bids and results of games on their floors-and blackjack and other gamblers I knew from old cardcounting and other casino-scheme days.

I suppose I should add a disclaimer at this point. I am known as an anti-Liar's Poker activist. Many people claim that the games were fair and good fun. I have been accused of being puritanically opposed to gambling on the trading floor-also of organizing a cheating ring for Liar's Poker games. Another version credits me with a diabolically clever algorithm for beating the game. All false: I like gambling, the system was not cheating, and it was simple. But you're getting only my side of the story here. It's my book; let those guys write their own books if they like.

The traders had stacked the deck, but cheaters are always the easiest people to beat. Our side started with a few advantages. First, the data we were getting showed that the traders didn't know how to play. Their bids were too low and predictable. They fixed on one digit early and almost never changed it. The first guy would look at his number and bid, say, six plus the number of his most common digit. If he had 2 sevens, for example, and didn't have 3 of anything, he might bid 8 sevens. This is an entirely pointless bid. Without looking at his bill, there is a 55 percent chance of at least 8 sevens being out there. Given his 2 sevens, the chance rises to 74 percent. If he's completely bluffing and has no sevens, there's still a 43 percent chance that there are at least 8 sevens among the remaining bills. Given that the next player needs 90 percent certainty to challenge, you might as well bid 1 zero and not give away any information at all.

The next guy would use a similar rule. If he had 3 or more of anything, or 2 of a digit higher than seven, he would bid 6 plus that, otherwise he would bid 9 sevens. Pretty soon, it would go around the circle, keeping the digit the same, raising by 1 every time. Given our data on people's strategies, it was pretty easy to figure out when to challenge. Basically, if only 1 digit had been named, it probably had been overbid by the time it got to 12. However, if someone had come in with a new digit at a reasonably high level, it could often be a good bet, even at 14 or more.

The secret, we found, is that there are two kinds of games. In one, a digit gets picked up early, often because it is a high digit and none of the first few players have more than 2 of anything on their bills. In that case, the chance is less than 3 percent of getting 14 or more of the digit. So traders got used to thinking that 14 was almost impossible. But in other games, someone had 3 or 4 of a digit early and would change digits at a 10 or 1 1 bid. There is better than a 25 percent chance that there are more than 14 of some digit. Another underappreciated fact is that there is an 18 percent chance that the other 9 bills have 10 or more of a randomly picked digit. So if you have 3 or 4 of something in your hand, you can jump in with a new digit at the 13 or 14 level, without giving the next player a positive expectation of challenging you.

The system we came up with involved no cheating. You took the same action whether you were next to another system player or one of the traders. But it was quite different from the way people had been playing. The first system player would often challenge, at much lower levels than people were accustomed to. If he didn't challenge, the other system players would throw out bids in different digits, which kept the level from getting too high and usually meant that the bid came back around to the head trader. No one had seen the game played this way before, and no one knew how to react.

Another advantage we had was preparation and training. I wrote a computer simulator to let people practice thousands of hands. Even avid Liar's Poker players didn't have this kind of experience. The computer tracked actions and gave advice. This is commonplace in poker programs today, but it was a secret weapon in the early 1 980s. We also arranged some in-person practice sessions, without money. I encouraged people to play fast-this was even more disconcerting than the unusual bids. The last trader would say "eleven threes" and five system players would put it back to the head trader at 13 eights in five seconds. Not only did this make it hard to figure out what people had, it created the impression that the system players knew exactly what they were doing. No one had the nerve to challenge such rapid-fire confidence, and the head trader certainly couldn't lose to a quant.

This led to our last advantage. There were cracks in the establishment. The second trader wanted to beat his boss, and the third trader wanted to beat the second. As long as it was traders against quants, traders cooperated. But when it became clear that some trader would take the fall, they reverted to wild type. They could have adopted similar tactics to the quants, and it would have been a fair game, but they were too competitive among themselves. They weren't trying to maximize expected value; they were trying to beat and not get beaten.

I went along to watch the first time we tried the system. About two in the afternoon, a trader called for a Liar's Poker game. Six traders said they would be in, and all the quants came over. Some of them were invited into games but had been reluctant in the past, knowing it was rigged against them. When they all volunteered, the traders let them in, but, of course, made them sit together to the right of the head trader. The six traders got the bid to 1 1 twos, and the five quants machine-gunned it to 13 nines in no more time than it takes to shout out the bids. There was a minute of stunned silence, then the head trader challenged. Fifteen nines showed up in the bills. He accused the quants of cheating and refused to pay.

I had expected this. In the next stage, the quants laughed and started playing among themselves. They played just as quickly and with what seemed, to the traditional players, like reckless abandon. It was clear they had a system and knew better than the traders which bids were safe and which should be challenged. The traders had never seen the game played with lots of different final totals-traditional games tended to get up to 12 or maybe 13, seldom more or less. Moreover, in the quants' game the actual count was usually near the total, which often wasn't true in traditional games. It was clear to everyone that the quants had taken the game to a new level, and the traders had welshed. That particular floor stopped playing Liar's Poker. The traders didn't want to lose to the quants, but if they played without inviting them, they'd look scared.

If you think this was a pivotal event, you don't know trading floors. Revolts like this are common, part of moving up the ladder. You have to take a lot of abuse, but you also have to pick your time to stand up for yourself. If you pick right, you move up a rung. If not, you get slapped down. It's a long game, and the quants took a point, but it was only one point.

Other floors tried alternating the quants with traders, which would have destroyed a cheating system, but made good, honest play even stronger. The traders had given up their positional advantage, and spared the quants the difficulty of having a good player to the right or left. Eventually, attitudes toward the game changed. It had been considered a pure test of trading skill, but now it was clearly a geek game. Liar's Poker disappeared from trading floors. I don't know how much the quant victory had to do with that-games go in and out of fashion, anyway, and trading floors calmed down quite a bit in the 1 990s. But an impressive proportion of our Beat Liar's Poker crowd went on to successful trading careers.

I'm proud of the group that did this. We were part of a movement that tamed the wild excesses of the 1 980s without getting in the way of the valuable creative chaos. We proved you could have mathematical skills and the nerve to use them. We also demonstrated that in finance, poker, and Liar's Poker, you can always find a new way to look at an old game.

The message board stayed alive and tackled several other hazing/ gambling games that came along. I had only a peripheral involvement at that point. The biggest one was a football betting scheme in which you paid $1,000 and picked one team to win every week, with no spread. One loss and you were out. The twist was that you could use a team only once. It was easy to win the first few weeks by picking the biggest mismatches, but by then you had no good teams left and had to pick even games. It was played winner-take-all, and the pot got close to $750,000 the peak year.

This was a happier story. Most people played it casually at the beginning, like the NCAA or Wimbledon pools that pop up in every office. But by the fourth or fifth week, there might be only one guy on your floor who was still in the hunt. The whole office would get behind him, and the quants would be expected to come up with some football handicapping programs and strategic simulators. This was a game that required precision analysis, but also football knowledge and trading skill. Modern trading is a team effort and works best when everyone respects the essential talents of everyone else.

CHAPTER 9

Who Got Game

Дата добавления: 2015-10-26