Peter Diamond on Behavioral Economics

Peter Diamond on Behavioral Economics: "MD: Regarding behavioral economics, what persuaded you that this is important? Is it the evidence from psychological experiments?

PD: There are two separate pieces to this. One piece is, do you think the psychological evidence is credible as a basis for thinking that people behave in ways that are missing in a standard model. The second question you ask is what makes you think that it's important to economics. Some of these you don't even need the experience to say: yes this is okay. Thaler's piece on the Price of a Bottle of Beer is a classic. Two guys are on the beach, one guy says to the other, I'm going to get myself a beer. Do you want me to bring one for you? Second guy says, Yes please. First guys asks, What is the maximum you are willing to pay for the bottle of beer? If it's higher than that I won't bring it. There are two scenarios—scenario 1 is the place to go for the bottle of beer is a bar in the hotel that's near the beach. Scenario 2 is the grocery store that has some beer in it. When you ask people how much they're willing to pay, people expect to pay more and they give answers that reflect that, so you get very different answers in these two scenarios and it can't be that they're both actually measuring what beer is really worth to you on the beach that day."

(Via Economist's View.)