"Now suppose we discover that a Ph.D. economist buys a lottery ticket every week. We have to ask ourselves: Does this person really understand expected utility, on a gut level?"

Tricky question. It we look purely at the financial return, the odds, then no. If we look at the return in utility, possibly yes.

Is $1 too much to pay for a couple of days of pleasurable dreams about what one would do if one won? Don't we think that such fleeing from reality has some value to the one entering such a fantasy, a suspension of the rules of the real world?

If we don't agree that that has some value then it's going to be terribly difficult to explain why people spend $8 to do to the movies for 90 minutes.