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HOA Prisoner’s Dilemma

When HOAs might not cooperate even if it is in their best interest to do so.

We manage a HOA of 24 units on prime real estate in central Denver that has fallen into deep disrepair.  They were $80,000 condos that are now selling for $20,000.  A few homeonwers owe $80,000, many owe nothing and it is in everyone’s best interest to dissolve the HOA and sell it back into apartments, least of all because the City’s Code Enforcement has demanded $100,000 of improvements and balconies and sewer lines have collapsed necessitating a $7,500 special assessment per unit if the HOA is not sold.

We had our second meeting last night with the owners.  Everyone wants to sell, and everyone wants the highest price.  The problem is that those who own their properties free and clear will have to give up some of their profit so that those under water can walk from their properties.

In theory, everyone is in agreement.  In reality, nobody has enough information to balace their desire to maximize their loss with the need to get out before the special assessments hit.

Partnering with Local Innovations we used the example of the prisoner’s dilemma and the Dilbert video to show where everyone stood and how by cooperating everyone gets a better result than if they were all out for their own interests. If they only looked out for themselves,  no one would be able to sell and everyone would get a special assessment.

Next Steps:  We are surveying each homeowner to get a payoff from their mortgage company.  Most important is to find out what their objectives are and what they need to be happy.  We really want a win/win, indeed we cannot sell unless everyone agrees to a fair distribution of profits.  But first steps first, we need to find out their asking price, objectives and the minimum they will accept to be happy before we meet again.

The Prisoner’s Dilemma

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated the prisoners, visit each of them to offer the same deal. If one testifies for the prosecution against the other (defects) and the other remains silent (cooperates), the defector goes free and the silent accomplice receives the full one-year sentence. If both remain silent, both prisoners are sentenced to only one month in jail for a minor charge. If each betrays the other, each receives a three-month sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

If we assume that each player cares only about minimizing his or her own time in jail, then the prisoner’s dilemma forms a non-zerosum game in which two players may each either cooperate with or defect from (betray) the other player. In this game, as in most game theory, the only concern of each individual player (prisoner) is maximizing his or her own payoff, without any concern for the other player’s payoff. The unique equilibrium for this game is a Pareto-suboptimal solution, that is, rational choice leads the two players to both play defect, even though each player’s individual reward would be greater if they both played cooperatively.