As an aside, or perhaps Part II of the challenge, is to consider what happens when the "opponent" chooses words based on the degree of guessing difficulty (whether it's known that a certain guessing algorithm is employed, or just assuming generic hueristics about guessing).
in reply to Challenge: Design A Better Hangman Algorithm
For instance, when I've played casually with someone the first time, I usually pick "rhythm", since it has no conventional vowels. (This only works once though). After that, I would try a word from a set of words of the same length with many letters/positions in common, but not just a simple substitution. (This is harder as word length goes up.)
Can the algorithm have a special mode to counter biased word choice?
Quantum Mechanics: The dreams stuff is made of