A Logic Test
At "A Dash" we are seeking ways to help investors and traders fight the traps described in the literature of behavioral finance. One method, which we used successfully in the classroom many years ago, is to present problems wildly different from the main theme. Later, we try to show the connection.
This problem came from two different sources. We will credit the poker source tomorrow, but the inspiration to present it came from The Trading Goddess. Like many thousands of others we read her blog every day as a source of information and ideas. What sets the blog apart is the originality and style of presentation — educational and always …..entertaining. (We congratulate two of the bloggers we also read daily, the inimitable Muckdog and Bullish Jim, on their selection by the Trading Goddess as contributors. Nice recognition!)
Here is what caught our attention.
This image reminded us of the problem, which we have already tested on a strong group of very smart people. It may seem familiar to you. If so, you may be able to solve it quickly. Keep track of your time. Even if you do not play poker, you can solve this problem. It has a clear answer.
Here is the situation:
You find yourself visiting Chicago and the Old Prof answers your request to find a poker game. To help you play, you are reliably informed that the players — all options and futures traders from the Merc and the CBOE– are either bulls or bears.
The bears ( spoofed last week, and the good guys now) are completely honest. They always tell the truth in their statements, and they never bluff. The bulls always lie and frequently bluff, although they might fold a worthless hand.
You are playing with three others, but you do not know whether they are bulls or bears. You are the big blind, and when you look at your hand you are delighted to see two kings.
Trying to get a read on the table, you ask the next player whether he is a bull or a bear. He answers, but you cannot make out what he says. He folds.
The next player, the button, looks at you. He says, "He told you that he was a bull." The button now folds. The last player, the small blind, looks at the player on the button and says,"You are a liar! You are a lying bull." She now looks at you and says, "I have pocket rockets (two aces, for the non-poker players) and I am going all in."
Does she have the hand in the picture? Who is telling the truth and who is lying? What should you do with your kings?
Please do not post your solution in the comments. You can email me for recognition in tomorrow’s post, where we will reveal the solution. The range of answers — all from very intelligent people, many of whom play poker — include complete failure and rapid solution. Keep track of your time to solve.