Lessons From Jeopardy

I’ll Take Analytical Hacks For $100, Alex

Who is James Holzhauer?

Why am I writing about Jeopardy? When I first heard there was some guy on a big winning streak, I assumed he was just another really smart guy who knew obscure stuff. Then, I read a couple stories on him and discovered something interesting.

Holzhauer isn’t necessarily more knowledgeable than the average Jeopardy player. Rather, he has adopted a different playing strategy that lets him take advantage of undervalued tactics to raise his odds of winning substantially.

Analytical Hacks For $200, Please

Who Are The Houston Rockets?

The NBA has experienced a revolution in 3-point shooting over the last five years and particularly the last three. In 1994, teams took about 10 3-pointers per game. By 2013, it had grown to 20 attempts. This season it reached 32!

Why? Because teams figured out the expected value of a three is > the expected value of a 2 point shot. On average a 3 pointer produces more than 1 point per attempt (if you shoot 35%, then your expected value is 1.05) whereas most 2 point attempts have an expected value around 0.8 (i.e. you make 40% of them).

There is a clear correlation between shooting more threes and winning games. The team with the best regular season record the last three years finished 2nd, 1st, and 5th respectively in three point attempts.

The biggest proponent is Houston who is the only team ever to average more than 40 three point attempts per season…which they have done three straight years now and they score > 40% of their total points from behind the arc!

The three pointer came into the league in 1980. Yet, it took 35 years for teams to do the basic math on it! Then again, Jeopardy started in 1964 and the Alex Trebek version goes back to 1984 and nobody “solved” it for 50+ years!

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What is Madden?

I think the origin of a lot of these “hacks” came through video games. Kids could figure out they had a better chance to win if they took advantage of the rules and started shooting threes and going for it on fourth down. As these kids grew up, got their math Ph.Ds and joined analytics departments at sports franchises, they probably started asking why the real athletes didn’t take advantage of these obvious tactics.

In the popular Madden Football franchise, players began to realize punting was a losing strategy. If you had a good offense, you shouldn’t just default to punting on 4th down as conventional wisdom suggested. If you did, you would love to someone who would take the calculated risk to go on 4th down if it was a reasonable distance (and also depending on the field position).

The New York Times a few years back did a great chart on when the math says you should go for it vs. punt. Then, to rub it in, they showed what the typical NFL coach did (answer: they played it much more conservatively).

The first team to really start exploiting the hack was the 2017 Philadelphia Eagles. The Eagles converted 20 of their 29 fourth down attempts that year. They scored 74 additional points as a result, nearly 4 on average per game including 11 in the Super Bowl.

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What is the Daily Double?

I’m guessing some of you will say “no, he’s winning cause he’s fast on the buzzer“. And yes, that’s true as well but others have done that before. I consider that though to be more of a skill than a strategy. It’s like practicing your jumper. You need to be able to make a 3 before you start taking all your shots from there or it doesn’t work so well.

The strategic edge Holzhauer has is his aggressive play of Daily Doubles which allows him to build large leads quickly. There are three components to his strategy.

First, he uses his fast buzzer to build an early lead so he can bet more when he finds a DD. Second, he has studied where on the board DDs are more likely to appear (hint: not in the $100 and $200 questions). Third, he bets big when he finds one with an average bet of nearly $10K vs. a typical competitor who bets ~$2500.

Per the 538 story, this has led to him finding 83% of the available DDs and he has gotten the correct answer 91% of the time. That success rate certainly suggests bet as much as you can rather than being risk averse! Note the final advantage he benefits from: by betting big (and being right) on daily doubles, he builds an insurmountable lead that clinches the victory before Final Jeopardy. This also lets him bet big again there to pad his winnings without risk of blowing the match.

Analytical Hacks For $500, Alex

Who Is Warren Buffett?

If you look at Buffett’s success, a lot of it came from developing simple principles that gave him an edge and having the discipline to follow them and not engage when those conditions weren’t present.

For example, consider this quote:
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”

That sounds an awful lot like jumping in with both hands during the financial crisis and selling high coupon preferreds. It also sounds like betting big on a Daily Double when you’re 90% sure you’ll answer it right.

How about the famous comments on temperament?
“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

Recall those football coaches who wouldn’t go for it on 4th & 1. They were too afraid of being second guessed if it didn’t work out! They didn’t have the right temperament to make the rational decision.

I can even argue that the Rockets have created a “circle of competence” around analytics that led them to realize they could exploit the 3 point line and not waste their efforts on trying to be a well rounded team.

And Here Is Today’s Final Jeopardy Clue

What is sports gambling?

That’s right, Holzhauer is a professional sports gambler often called a “sharp”. A sharp is a gambler who is considered very well informed and often has a mathematical model or other repeatable approach that allows them to beat the sports book over time.

He surely was well aware of what the Rockets have done in the NBA and what the Eagles did in the NFL. He looks for similar edges in wagering lines where the house has a bias in how it sets the line or perhaps where the public overbets one side and he can take the other side on favorable terms.

It is no surprise, at least to me, that someone with this background would be the type to find a more favorable way to play Jeopardy. Not to open up a can of worms and start a whole new post, but arguably these situations show why markets aren’t really efficient.

We would have argued a month ago that Jeopardy was “efficient”. People had been playing it the same way for 50 years! And then someone came along and found a whole bunch of alpha lying around.

Markets may approximate efficiency, but there are gaps where someone with the right temperament, knowledge, and effort can come along and make a lot of money without taking a lot of risk.

To attribute that success to “luck” or the “well, a normal distribution would suggest there is someone in the tail who randomly would have this kind of success” is frankly a sign of a lack of intellectual rigor. It may not be common to find people that can take advantage of these opportunities, but they do exist and often the solutions are relatively obvious if you don’t approach the problem with preconceived notions.