Honestly, I think this is a lovely idea - obviously so long as there are distinct benefits and penalties to the various difficulty settings.
Besides, I like experiencing these things just to see them and the bits of story surrounding, and not having to bicker with hardcore raiders when I'm really not all that concerned about my DPS or the equipment I get at the end (although obviously I sometimes pursue gear.. want that Mercenary's Acton >.>)
At the very least, I think we should have a 'Normal', comfortably challenging mode that doesn't require perfect group cohesion and pimped out gear.. and then an extreme mode with appropriate rewards in turn.
Although that said, I do think normal mode ought be the default. Somehow it just feels right that players wanting the easier, less rewarding option ought be consciously selecting it - and same for the more challenging mode and all.
Anyway! Just to say I'm in on this one, like on OP given and all.