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Luck Logic and White Lies, reviewed by Victor Niederhoffer**, October 19, 2007

It is appropriate that the best book on games extant today is totally German in its authorship and first publishing, since Germany is mecca for games, with the average family owning 25 of them. The book "Luck Logic and White Lies" by Jorg Bewersdorff, originally published in Germany but translated into English in its third edition by David Kramer, is a masterpiece, an encyclopedia of strategy and solutions to almost every game under the sun, and a great exercise in logic and decision making, and a guide for how to have fun with your family. The book is divided into three sections, games of chance, games of combinations, and games of strategy. Each chapter in each section starts with a pregnant situation from a typical game from that section, traces the historical development of the game, shows how to play it better, and then contains mathematical excursions on how to solve the game. Games covered in the chance section include lottery, dice, roulette, monopoly, blackjack. Games of combination include Nim, backgammon, Go, dominoes, Mastermind, Concentration. Games covered in the strategy section include rock paper scissors, poker, chess, baccarat. Building blocks covered to help you solve and play games include a study of the normal and Poisson distributions, a primer on expected values, Markov chains, Monte Carlo methods, minimax solutions, linear optimization, the game theory work of Von Neumann and Morgenstern, the geometry of symmetry, the value of experience. All these building blocks are developed naturally and form a foundation for understanding how to play the games properly as well as providing a brush up on techniques that one is accustomed to using in other fields. The book is readily accessible to all who like numbers, but provides many extensions that will challenge even the most competent and advanced thinkers in mathematics. Morgenstern studied games because he felt every decision in life was comparable to one of the chance, combinatorial or strategy games that evolve in the normal course of life. I would recommend traders study games because each game has a natural extension in the trading world. Let's take a simple strategy game formulated by Poe and developed in the rock paper scissors chapter. One player holds the marbles in one hand, and asks the other player whether the number is even or odd. If the guess is wrong, the guesser loses. And if right, the guesser wins. One boy wins all the marbles from everyone in school. He had some principles of guessing. He sees whether his opponent is a simpleton. His amount of cunning is sufficient to make him change his guess based on the opposite of the right answer the previous time. But with a simpleton a degree above the first, he would propose a simple variation. And think that the simple changing is too easy and guess the same the next time. The boy who wins figures out what degree of simpleton he's playing against and wins all the marbles. But isn't this the same situation we play with the market each day. It has a certain pattern that would have led to a great win. And depending upon your estimate of the degree of simpleness of the other players in the game, you figure out the optimal strategy. Strangely, there are ways of playing these games that increase your expecation, especially those that rely on changing strategies based on experience. Similar principles and mathematical excursions that are appropriate for solving combinatorial games, like Nim, where one works out the entire distribution of outcomes as in computing the value of an option, or chance games like monopoly, where one takes account of the changing values of a position based on the liquidity and expectations, are appropriate to every decision a trader makes. One can not recommend this book too highly for the family person and trader.

*Daily Speculations* (www.dailyspeculations.com), October 19, 2007