True Daily Doubles

What we can learn from Jeopardy to better manage risk

James Holzhauer, although officially not the GOAT of Jeopardy, understood something that most people did not. In a coin-flip situation, you should be “indifferent” to doubling your money or losing all of it; and, because double jeopardy is far better than a coin flip, you should generally make double jeopardy a “true daily double.” But most people don’t bet all of their money. Why?

What separates Holzhauer from most players is that he was “risk neutral.” By contrast, most players are “risk averse.” They accept a lower “expected value” by placing a smaller bet than they should given the odds.

One explanation for this risk aversion is the cognitive bias known as loss aversion. Loss aversion explains that people might irrationally prefer to “not lose” rather than “win.” In other words, once you’ve earned the money you’re gambling on Jeopardy, you probably feel attached to that money, so you are more afraid of losing it than you are of getting double the amount. Because of loss aversion, players made smaller bets.

Loss aversion is not always the same as risk aversion. And even Holzhauer recognized situations where it’s strategically better to place a lower expected-value bet. But, in general, Holzhauer’s mastery of Jeopardy can help us consider where, in our professional work, our fear of losing can limit our ability to win big.