A Brief Dialogue on Behavioral Economics

The Importance of Framing the Issue Properly...

(Even though I was a major participant in this dialogue, it was several years ago. So I have followed the historical methodology of Thucydides: I have written as if each participant said what was appropriate and fitting for the situation, all the while staying as close as possible to the words actually said.)

Time: A warm spring evening at the height of the tech boom.

Place: A chi-chi downtown Palo Alto restaurant.

Stanford Professor and Hoover Institution Fellow Robert Hall: And now for the wine?

Berkeley Professor Brad DeLong: (Looks at wine list.) I'd rather not. They look too expensive for what they are.

Hall: But I'm paying. The Stanford macro seminar is paying.

DeLong: So?

Hall: I'm the one who should be worrying about that, not you. Go ahread and order.

DeLong: Why can't I worry about it?

Hall: Because you're not paying. The price is irrelevant as far as you're concerned. It's all free to you.

DeLong: It's free to me in the sense that buying it doesn't diminish my future opportunities to buy other things. But there's another sense in which it is not free.

Hall: And that would be?

DeLong: We'll order it. We'll start drinking it. I'll think about how we paid three times retail. I'll think about how the restauranteur has taken advantage of his local monopoly power to charge us far more than the market equilibrium value of the wine. I'll feel exploited... taken advantage of.... And the wine will taste like ashes in my mouth.

Hall: You're insane!

DeLong: Possibly.

Hall: Some of these are very, very good.

DeLong: But I won't enjoy them.

Hall: You shouldn't think about how much it cost while you drink it!

DeLong: Are you saying that I shouldn't have the preference function I happen to have?

Hall: I tell you what. Look at this guy. (He gestures to the restauranteur.) Eighty percent of Palo Alto restaurants fail within three years.

DeLong: Yes?

Hall: This guy is working 18 hours a day and sinking his life savings into this enterprise. Yet he's very very poor because he's very likely to go bust and bankrupt.

DeLong: Yes?

Hall: You have the opportunity to transfer some wealth to him, to make him better off, and in the process drink a very very nice bottle of wine.

DeLong: And I should make this transfer because?

Hall: The money transferred comes straight out of the Hoover Institution endowment. Think what else it would be used for, if not to assist a struggling Palo Alto entrepreneur.

DeLong: I see...

Hall: As an ex-Clinton Administration Senior Treasury Official, I think your duty here is clear. You have a strong and unavoidable moral duty to choose a bottle of wine for us to drink...

DeLong: That is a strong point...

Hall: An expensive bottle of wine...

DeLong: I surrender...

Hall: Two expensive bottles of wine...

Posted by DeLong at March 8, 2003 08:45 AM | TrackBack http://www.j-bradford-delong.net/movable_type/2003_archives/001140.html