I don't buy lottery tickets.. but I still dream about what I'd do if I won. I realised a while back that i don't actually have to pay to have those dreams.

Yes, I agree. Part of my brain does not understand the difference between a small chance of something happening and a really small chance of something happening. Probably the same thing is true of most people, including PhD economists.

It's doesn't seem unreasonable to spend $10 a year to humor one's inner moron.

It might be a different story if those same PhD economists were spending thousands of dollars a year on lottery tickets. But even then, the most likely explanation is that the PhD economist has a gambling problem. And like most addicts, he knows that he's behaving irrationally; he just has a hard time controlling himself.

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?

Even if that's the justification, you can do better: http://lesswrong.com/lw/hl/lotteries_a_waste_of_hope/ It's not clear that lotteries are a good use of time: you aren't thinking 24/7 about your dreams, you dream for maybe a few minutes total, and from that perspective, $1 is far too much to pay when you can, say, download a totally engrossing movie from the Internet for $0. And that argument still serves to ban more gambling than say $10 a day, which many gamblers routinely violate.

I partially AWYC, but unless there's some aspect to the experience that I don't get, I don't see why actually buying the lottery ticket is necessary.

Going to a movie helps one escape into fantasy. A lottery ticket seems like a much less helpful prop for this. I can - and have, particularly as a child - fantasize about what I would do with wealth and status (although the means of achieving such, in my fantasies, has generally been the slightly lesser improbability of becoming a famous author or something similar) completely unaided.

In fact, it might be better to do as I did and imagine achieving your incredible wealth by some means other than lottery winnings, precisely because winning the lottery is so improbable. Thanks to a horrifying history of akrasia on that front and some amount of realization that I really want to do science instead, I haven't actually made any effective moves towards becoming an author, but nevertheless it is, I think, an accepted fact that people will be more motivated to do what they fantasize about.

Why not let them be motivated to do something actually useful?