Do Neoclassical Economists actually believe this?

[Sophronius]

Hello JREF,

For the past three years now, I have been following a study in economics and business. During this period, I found that the views of economists at my university could basically be divided into two distinct parties: The Behavioural Economists and the Neoclassical Economists. I have followed various courses from economists adhering to either of these philosophies, which I found very interesting as I got to hear both viewpoints. I was determined to find out which group made the most sense, whether one party was clearly in the right or whether the truth lay somewhere in between. As such I took every opportunity I could to engage in discussion with these people and find out what they thought about specific subjects.

Well, during that period I had heard reasonable arguments from both parties, and as such begun to suspect that the truth wasn't as clear cut as, say, the "debate" between evolution and intelligent design. That is, until today. When I asked a professor who identified himself as a Neoclassical Economist why people take part in lotteries, this was essentially his answer:

"The only logical explanation is that they have different utility curves for decisions involving higher amounts of money than for lower amounts. For them, they must value a gain in money of one million so much more than a smaller gain that this completely offsets the incredibly small chance of actually winning the lottery. People take part in the lottery because for them it is a well calculated and perfectly sound economical decision.

So I ask him: "But surely, that can't be the only explanation? I learnt in behavioural finance that people take part in lotteries because they value a small but non-zero chance of winning much higher than a 0 chance. This is called the certainty effect. Many people simply don't understand or don't think about how low the odds really are. Also, people who take part in lotteries do this because they derive a satisfaction just from thinking about the possibility that they will win. If you only use a simple calculation of expected monetary gain to justify their decision then you are ignoring a very important factor. You can't seriously say that psychology plays no role in the decision to take part in lotteries.

"No, money is the only factor. You can't just handwave decisions like this away by using psychology and saying that people aren't rational. You could explain anything that way."


I found this pretty unbelievable. I was willing to give this guy the benefit of the doubt before, as he did admit that people in practice aren't perfectly rational or not rational according to economical definitions (but often still rational from their perspective) but this explanation for why people take part in lotteries just doesn't make any sense to me at all.

Is this generally what neoclassical economists believe? This whole idea of "If a decision is made, then it must have been rational in some way because otherwise economical theory wouldn't work"? Is it so hard to see that people just aren't very rational, not just some people some of the time, but the clear majority when it comes to certain aspects? I think the very existence of religion for example shows very clearly that people don't rely on cold logic for making some of the most important decisions in their life. :confused:

So yea. I would very much like to see some data/hear what other have to say on this subject. If this is really what is generally believed among neoclassical economists, then I find that more than a little worrisome...

[Dunstan]

Is this generally what neoclassical economists believe? This whole idea of "If a decision is made, then it must have been rational in some way because otherwise economical theory wouldn't work"?

It's not.

On a related note, physics professors don't actually believe that cows are spherical or that all surfaces are frictionless.

[A Laughing Baby]

The disconnect here is that you have a notion of what is rational, whereas the definition that neoclassical economics uses does not fit your definition. In other words, you define rational according to the usual definition of the word (understandable, as it is what most people define it as).

However, in neoclassical economics (in vastly oversimplified terms), if someone has an end goal in mind along with a set of preferences, and works toward that goal within their preferences, they are acting economically rationally. The classic example of "irrational" behavior is a suicide bomber. Why would someone kill his or herself? Clearly irrational behavior. However, if the person is motivated by political ideals, as well as the well-documented examples of suicide bombers being idolized and their families being well-taken care of after their deaths, it would indeed be an economically rational decision.


In this way, you can see that participating in the lottery, while not a wise move statistically (and therefore irrational in the classical sense), can be seen as an economically rational decision. If a person places personal value on the risk they are taking in the lottery, and if they consider the potential value gained to be greater than the risk taken by participation, it's an economically rational decision.

ETA:

All that said, pretty much any economics professor or graduate that's worth his or her salt will tell you that economic theory is useful only to a point due to its stringent assumptions, which do not closely mirror real life at all. The issue is that economics tries to model the overly stochastic processes of the real world in terms of models which are unchanging and follow rules. Clearly, this would have its limits, and therefore you must make certain assumptions. This is one reason why economics is widely considered (even by economists) to not be a true science.

[Sophronius]

It's not.

On a related note, physics professors don't actually believe that cows are spherical or that all surfaces are frictionless.

I was expecting responses like this, because I know it kind of sounds like a straw man. But this is what my professor seriously claims is the neoclassical point of view.

If you say that he is just a crackpot, what would you say IS the neoclassical explanation for people partaking in lotteries?

The disconnect here is that you have a notion of what is rational, whereas the definition that neoclassical economics uses does not fit your definition. In other words, you define rational according to the usual definition of the word (understandable, as it is what most people define it as).

However, in neoclassical economics (in vastly oversimplified terms), if someone has an end goal in mind along with a set of preferences, and works toward that goal within their preferences, they are acting economically rationally. The classic example of "irrational" behavior is a suicide bomber. Why would someone kill his or herself? Clearly irrational behavior. However, if the person is motivated by political ideals, as well as the well-documented examples of suicide bombers being idolized and their families being well-taken care of after their deaths, it would indeed be an economically rational decision.

No, I am perfectly well aware of this. However, I would say that people still don't act rationally according to that definition. This is because people frequently act directly against their own interests. For example, you can have a person make a completely different decision simply by changing the wording in a question. When presented with several options, where one is the inferior one in every single aspect, a person may well pick the inferior option. Many people participate in lotteries because they are simply incapable of grasping how small the chances of winning are, and go as far as to say that they can't understand why anyone would not want to play in the lottery. The only way you can call these actions "rational" is if you define rational as "any action that is motivated by a reason of any kind", which would cover absolutely any action made by any person in the world and as such would make the phrase completely meaningless.

In this way, you can see that participating in the lottery, while not a wise move statistically (and therefore irrational in the classical sense), can be seen as an economically rational decision. If a person places personal value on the risk they are taking in the lottery, and if they consider the potential value gained to be greater than the risk taken by participation, it's an economically rational decision.


This might be the case for some people. However, the statement that psychological factors do not come into play for such a decision, or that virtually everyone who takes part in the lottery is aware of the odds of winning and losing, and calculates the expected gains and losses in order to come to a decision on whether to take part or not.... is completely unrealistic.

The simple fact of the matter is that people with higher IQ are less likely to take part in lotteries. To say that IQ does not enter into the decision making process is ridiculous.

All that said, pretty much any economics professor or graduate that's worth his or her salt will tell you that economic theory is useful only to a point due to its stringent assumptions, which do not closely mirror real life at all. The issue is that economics tries to model the overly stochastic processes of the real world in terms of models which are unchanging and follow rules. Clearly, this would have its limits, and therefore you must make certain assumptions. This is one reason why economics is widely considered (even by economists) to not be a true science.

I'm really not sure if this is true or not. Of course, neoclassical economists say things like "of course, these assumptions are not perfectly realistic" all the time. But in my experience most of them do believe that the assumptions are not too far from the truth. And they do believe that economy is a science, even if it isn't perfect.

[A Laughing Baby]

I've got a Master's in Economics (not a doctorate, but maybe someday), and I always thought that some of the assumptions we made in theory were quite ridiculous. I am always a bit wary of the rational actor argument that goes on, because it's simply too easy to handwave away anything that doesn't make sense on its surface as "people are irrational."

I don't, however, feel that people make calculated decisions on the costs and benefits of a decision for EVERY decision. The process seems to be quite organic and quick, even subconscious. For a good example of this, watch "Deal or No Deal." It's a perfect illustration of microeconomic decision theory in a controlled environment. Participants make decisions based on their expected value from continued play vs. their guaranteed present value from exiting, and decide as such. They clearly do not say "well, as a risk-averse actor, my utility may be expressed as follows..." and yet they clearly base their decisions on some internal reasoning. I feel that while there is merit to rational actor assumptions, I do agree with you that they have their limits. However, I feel that by and large, they hold water, especially in economic decisions.

I hope this clears up what I'm trying to say on the matter!

[Dunstan]

I was expecting responses like this, because I know it kind of sounds like a straw man. But this is what my professor seriously claims is the neoclassical point of view.

I don't think that's really the case. Let's look at how you reported the dialogue (all emphasis and editing mine):

"The only logical explanation is that they have different utility curves for decisions involving higher amounts of money than for lower amounts. For them, they must value a gain in money of one million so much more than a smaller gain that this completely offsets the incredibly small chance of actually winning the lottery. People take part in the lottery because for them it is a well calculated and perfectly sound economical decision.

I found this pretty unbelievable. I was willing to give this guy the benefit of the doubt before, as he did admit that people in practice aren't perfectly rational or not rational according to economical definitions (but often still rational from their perspective) but this explanation for why people take part in lotteries just doesn't make any sense to me at all.

It seems to me that even your version of the conversation that so alarmed you contains plenty of disclaimers. He acknowledges that people aren't always rational, and that you can come up with other explanations, just not other "logical" ones.

If you say that he is just a crackpot, what would you say IS the neoclassical explanation for people partaking in lotteries?

I don't think he's a crackpot. I think this professor was giving you an answer for how you can explain participation in lotteries within the confines of some simplified and admittedly unrealistic assumptions. I don't see any indication that he thinks this is truly the "correct" explanation of reality.

Economic models aren't intended to be completely accurate detailed descriptions of reality. They're intended to be useful structures for analyzing data and behavior and forming hypotheses. The fact that a model isn't a completely accurate description of reality is not a flaw. If a model is leading you to inaccurate conclusions on relevant matters, then yes, it's time to revisit your model.

Hence my examples of spherical cows and frictionless surfaces. Physics professors don't really think these are accurate assumptions about reality; these are just ways of putting aside complicating factors to study (or, more commonly, to test students' understanding of) simpler problems. And for that matter, economists don't really believe that people explicitly perform multivariate calculus in their heads to maximize their utility function over a near-infinite number of goods, any more than neurologists believe that people explicitly perform such calculus to catch a baseball.

I'm not aware of any serious academic research on the psychology of lotteries. I'm sure it exists; it just never came up in my studies. So I can't tell you what the "official" neoclassical explanation is, assuming such a beast exists.

I suspect that most economists speaking off the top of their heads would give you some combination of (1) utility curves do weird things at the extremes; (2) people derive utility from the at least plausible fantasy that they might win the lottery, over that time period between when they buy the ticket and when the draw is held; and (3) people aren't strictly rational.

Your professor was describing, I think, a combination of (1) and (3).

The simple fact of the matter is that people with higher IQ are less likely to take part in lotteries. To say that IQ does not enter into the decision is ridiculous.

Possibly. Does your data control for socioeconomic status as well?

I'm really not sure if this is true or not. Of course, neoclassical economists say things like "of course, these assumptions are not perfectly realistic" all the time. But in my experience most of them do believe that the assumptions are not too far from the truth.

And my experience is the opposite.

And they do believe that economy is a science, even if it isn't perfect.

Well, they think it's an appropriate subject of rational inquiry that makes useful conclusions and predictions about the real world, if not nearly as accurately as we'd like. Whether they'd use the term "science," or qualify it as "social science," or disclaim that term altogether I couldn't really say. Economists do have a tendency to look down their noses at the sociologists down the hall, of course.

[Sophronius]

I've got a Master's in Economics (not a doctorate, but maybe someday), and I always thought that some of the assumptions we made in theory were quite ridiculous. I am always a bit wary of the rational actor argument that goes on, because it's simply too easy to handwave away anything that doesn't make sense on its surface as "people are irrational."

I don't, however, feel that people make calculated decisions on the costs and benefits of a decision for EVERY decision. The process seems to be quite organic and quick, even subconscious. For a good example of this, watch "Deal or No Deal." It's a perfect illustration of microeconomic decision theory in a controlled environment. Participants make decisions based on their expected value from continued play vs. their guaranteed present value from exiting, and decide as such. They clearly do not say "well, as a risk-averse actor, my utility may be expressed as follows..." and yet they clearly base their decisions on some internal reasoning. I feel that while there is merit to rational actor assumptions, I do agree with you that they have their limits. However, I feel that by and large, they hold water, especially in economic decisions.

I hope this clears up what I'm trying to say on the matter!

What you say makes sense, and I mostly agree on what you say about rationality. (I actually had to watch deal or no deal for Behavioural Finance) What I've noticed is that the method of reasoning people use depends very much on the way the problem is posed. For example, if you ask someone to make an economical decision (for example, what car to buy) and you then provide him with a list of statistics about the various cars, they will make their decision based on cold logic. If you provide them with a picture of the two respective cars, and one of them is clearly superior but the other has a naked girl in it, then the person might choose the second one (although the naked girl is clearly not included)

I think the same holds for investors. A person may have a perfectly reasonable decision making process when it comes to picking stocks (although in practice this leaves much to be desired. Home bias etc.) but then if they find that their stock is dropping suddenly, they could get a panic reaction and sell all their stocks based on that.

The point is, people only act rationally some of the time, while at other times all logic may fly out of the window in favour of knee jerk reactions (which I would not consider rational, no matter how you look at it). As such, I do not understand why so many neoclassical economists act like psychology is the work of the devil and stubbornly try to fit an economical peg into a psychological hole.

[Sophronius]

It seems to me that even your version of the conversation that so alarmed you contains plenty of disclaimers. He acknowledges that people aren't always rational, and that you can come up with other explanations, just not other "logical" ones.

Ah, he actually did not say "logical". He said "possible". My bad.

It is possible, although I don't think it is likely, that he was mainly talking about what is practical to assume for the sake of the model rather than what is actually the case. However, when pressed about it he absolutely refused to consider a non-economical explanation. He insists that if you accept a psychological explanation for an economic anomaly, then you'd have to throw out all of economy and "go do something else, like psychology or something"


Economic models aren't intended to be completely accurate detailed descriptions of reality. They're intended to be useful structures for analyzing data and behavior and forming hypotheses. The fact that a model isn't a completely accurate description of reality is not a flaw. If a model is leading you to inaccurate conclusions on relevant matters, then yes, it's time to revisit your model.


This would be reasonable. This is not my experience on what actually happens. When an economist finds that his predictions are not accurate, he finds an explanation and concludes "Thus this was logically the only thing that could have happened and the model is right anyway". I have never heard a neoclassical economist admit that there might be a psychological explanation for an anomaly, it is always a case of "An economical explanation that supports my views can be found, you just need to look really hard."

Of course I have met plenty economists who are more reasonable in this regard, but they don't identify themselves as neoclassical.

Hence my examples of spherical cows and frictionless surfaces. Physics professors don't really think these are accurate assumptions about reality; these are just ways of putting aside complicating factors to study (or, more commonly, to test students' understanding of) simpler problems. And for that matter, economists don't really believe that people explicitly perform multivariate calculus in their heads to maximize their utility function over a near-infinite number of goods, any more than neurologists believe that people explicitly perform such calculus to catch a baseball.

Of course not. But this one at least does believe that one should never use a psychological explanation for anything in economics. And he explicitly said that people who partake in lotteries do this because it is a sound economical decision and that psychology or ignorance of the actual odds do not enter into it.

I suspect that most economists speaking off the top of their heads would give you some combination of (1) utility curves do weird things at the extremes; (2) people derive utility from the at least plausible fantasy that they might win the lottery, over that time period between when they buy the ticket and when the draw is held; and (3) people aren't strictly rational.

Your professor was describing, I think, a combination of (1) and (3).

He did indeed give answer number (1). However, this doesn't explain how people make decisions. People frame thing in terms of gains and losses, and vastly overvalue small but non-zero odds. To ignore all of this and simply say "well, they must value that potential million euro so much that it offsets the fact that the odds of winning are close to zero" is not realistic at all.

(2) I find completely sensible, as I mentioned before. However, when I mentioned this to my professor, he dismissed it as psychological handwaving, which of course has no place in economic discussion.

(3) is something that all economists will admit, but many of their beliefs still seem to be based on the idea that people are. Again, he refuses to accept this as being part of the explanation, because that would be 'uneconomical'. :/

Possibly. Does your data control for socioeconomic status as well?

Knew you would ask that. I think it did, but not 100% sure. It makes intuitive sense, anyway. I don't believe for a moment that the average person who plays in the lottery understands the odds involved.

And my experience is the opposite.


That's reassuring.

[BobTheCoward]

My favorite quote is all models are wrong, some are useful.

So, let's logically interpret this professor's explanation of rational lottery playing and what would happen if we change behavior.

-If we raise or lower the cost of a ticket or raise/lower the reward, the number of tickets purchased would change.

-If we ban it, they would substitute into other forms of gambling.

-If not run by the government, a private market would start up for lottery.

All of those I am sure there are historical examples. So, from an economics perspective, what makes certainty theory better? What is wrong with the rational actor model for lottery tickets?

[Sophronius]

My favorite quote is all models are wrong, some are useful.

So, let's logically interpret this professor's explanation of rational lottery playing and what would happen if we change behavior.

-If we raise or lower the cost of a ticket or raise/lower the reward, the number of tickets purchased would change.

-If we ban it, they would substitute into other forms of gambling.

-If not run by the government, a private market would start up for lottery.

All of those I am sure there are historical examples. So, from an economics perspective, what makes certainty theory better? What is wrong with the rational actor model for lottery tickets?

Leaving out relevant factors decreases the accuracy of the model. For example, if you don't take into account psychological factors such as the hope that buying a lottery ticket gives to some, then you'll expect decreasing the odds of winning to have a stronger effect on the amount of purchases than actually occurs in reality. Likewise, if a neoclassical economist were to assume that people buy cigarettes simply "because it gives them utility X" then he would conclude that a price increase would have a much stronger effect than is actually the case, due to the addictive nature of cigarettes.

[A Laughing Baby]

Actually, cigarettes are generally used as the prime example of a demand inelastic good due to their addictive nature.

[Sophronius]

Right, I used cigarettes as an example because everyone knows this to be the case (and takes it into account). This was to illustrate how leaving out important factors in your assumptions weakens your model.

[A Laughing Baby]

Ah, I misinterpreted what you were saying there. My fault.

[BobTheCoward]

It is humorous that you would pick cigarettes as a sign of addiction leading to inelasticity. Econometric studies for the price elasticity of cigarretes I have seen ranges from -0.6 to -1.2

Not what most people would guess.

[Puppycow]

"No, money is the only factor. You can't just handwave decisions like this away by using psychology and saying that people aren't rational. You could explain anything that way."

In neoclassical economics, people maximize utility, not money, so money is not necessarily the only factor. They may enjoy the thrill of gambling, which gives them utility.

To me, that would be a simpler neoclassical fallback position.

[Puppycow]

It is humorous that you would pick cigarettes as a sign of addiction leading to inelasticity. Econometric studies for the price elasticity of cigarretes I have seen ranges from -0.6 to -1.2

Not what most people would guess.

Is that elastic or inelastic?

ETA: Apparently, a range from relatively inelastic to relatively elastic.
http://en.wikipedia.org/wiki/Price_elasticity_of_demand#Interpreting_values_of_ price_elasticity_coefficients

ETA2:
Cigarettes (US)[41]

* -0.3 to -0.6 (General)
* -0.6 to -0.7 (Youth)

That would be fairly inelastic then.

[Sophronius]

In neoclassical economics, people maximize utility, not money, so money is not necessarily the only factor. They may enjoy the thrill of gambling, which gives them utility.

To me, that would be a simpler neoclassical fallback position.

Sure, but the utility of a person is influenced solely by money in neoclassical economics. Preferences are only displayed in the form of the shape of the indifference curve. I don't see how this could possibly capture the psychological factors (not to mention ignorance of the odds) that cause people to participate in lotteries.

[BobTheCoward]

Is that elastic or inelastic?

ETA: Apparently, a range from relatively inelastic to relatively elastic.
http://en.wikipedia.org/wiki/Price_elasticity_of_demand#Interpreting_values_of_ price_elasticity_coefficients

ETA2:


That would be fairly inelastic then.

Wow. Those would be the lowest values I have seen. I couldn't find that book in my school's online library (its a textbook). A just quickly glanced through some regressions and it has a fairly large range. Let me see if I can find a survey of all the studies.

[A Laughing Baby]

It is humorous that you would pick cigarettes as a sign of addiction leading to inelasticity. Econometric studies for the price elasticity of cigarretes I have seen ranges from -0.6 to -1.2

Not what most people would guess.

I really doubt, to be honest, that most examples used for classroom understanding are based on multivariate regressions' output. People "get" that cigarettes are something people will buy no matter the price (to a point), while, say, luxury cars are not. I'm not surprised though, in the ranges you expressed. I would blame the range on sampling error, if anything. Most econometric studies simply don't take big enough samples in my opinion.

But then, a lot of econometricians disagree with the methodology of large-sample statistics.

[Puppycow]

Sure, but the utility of a person is influenced solely by money in neoclassical economics.

:confused:

I don't think that's right. People may forgo money to spend more time in leisure activities for example.

Got a source for that?

[A Laughing Baby]

Yeah, utility definitely isn't purely money based in neoclassical economics. In fact, the intertemporal budget constraint is based around the concept that people gain utility from not working.

ETA: not to mention that indifference curves are meant ONLY to show preferences between two goods holding all else constant.

[BobTheCoward]

I really doubt, to be honest, that most examples used for classroom understanding are based on multivariate regressions' output. People "get" that cigarettes are something people will buy no matter the price (to a point), while, say, luxury cars are not. I'm not surprised though, in the ranges you expressed. I would blame the range on sampling error, if anything. Most econometric studies simply don't take big enough samples in my opinion.

But then, a lot of econometricians disagree with the methodology of large-sample statistics.

Right, and my statement wasn't to win a miss smartypants contest. It was a wonderful coinincidence because I just had this same discussion a few weeks ago.

[A Laughing Baby]

Yeah, no worries. I am interested by the study you mentioned though. If you find it, put a link in here!

[roger]

"No, money is the only factor. You can't just handwave decisions like this away by using psychology and saying that people aren't rational. You could explain anything that way."Then all he is doing is hand waving everything away by redefining 'rational' to fit whatever the person is doing at the moment. People are more than calculating machines. We know, for example, that people are more likely to engage in risky sexual behavior when aroused. Now, sure, I can think of ways to describe that in terms of payoff, utility, or whatever, but it is just handwaving, and ignores the very real role hormones are playing in the behavior.

In situations like this, we don't look for 'hand waving' so much as we look for "predictive value". Does this theory have predictive value? It also has to incorporate and explain existing data. We have existing data that a lot of people consider themselves very likely to win a lottery -they are 'lucky', they are playing their dead brother's birthday numbers, God showed them a sign, etc. Waving all that away, or just glibly saying the person is acting to maximize their choices as they understand them, is, well, glib.

I recall Greenspan's shock at the credit crisis. I'm SHOCKED, shocked, I tell you, that bankers were motivated by short term rewards, greed, the assumtion that they could get out before the bubble crashed, etc.

In contrast, I recall the book "Irrational Exhuberence", which ironically borrowed the title from a phrase by Greenspan. Instead of treating people as rational agents, the books looks at all of people's motivations, and does both a good job of explaining past events, but predicted future ones (the first edition predicted the real estate bubble and crash).

Finally, I'm reminded of another philosophy that depends on people being rational agents - libertarianism. We've had a poster on her seriously argue that we should have no food inspections, because the owners would rationally decide that putting out bad food would hurt their business. Restaurants should not be inspected, because customers would rationally stay away from the ones with tainted beef and rats in the kitchen. Restaurant owners would rationally allow customers in the kitchen to inspect for rats because refusing would be bad for business. there should be no labor laws because employers would rationally choose to not put their workers in danger. When you point out all the safety violations, restaurants that currently don't pass inspection, you get some explanation how that is a rational response to the undue pressures exerted by the government.

I'll tell you now. The markets will again be irrational. We will have more extremely bad behavior, more crises, and more downfalls of the people that were trying to profit from their short termed behavior. People will be motivated by ego, profit, stupidity, keeping their jobs. They will make big bets because they are depressed, their house is being foreclosed on, they have a margin call they cannot meet. Yes, of course there is 'utility' to each of those things. But restricting your conversation to 'utility' without discussing everything else that drives that explains nothing (it's pretty much just a tautology at that point) and has no predictive value.

[Sophronius]

I don't think that's right. People may forgo money to spend more time in leisure activities for example.

True, utility functions are commonly based around the choice between money and leisure. The point remains the same, however. If you try to use this model to explain why people participate in lotteries, you get a silly result.

@Roger: Aye, this was exactly the impression I have been getting for a long time. However, I have done my best to give these people the benefit of the doubt. It seems intellectually dishonest to assume that all of the experts in a certain field are completely oblivious to something like this, especially when I am only a bachelor student. It makes me feel like the kind of woo that we get around here all the time, who go "Oh lookitme, I just invented a model during my lunchbreak that explains psychic powers with science and it is all proven now and anyone who disagrees is just jealous."

But I have to admit that I am starting to get some serious doubts.

[A Laughing Baby]

I assure you this isn't meant to sound dismissive, but this has been a question raised for decades now. If you have a more elegant solution (and rest assured, I'm sure there is one), write a paper explaining it and have your name known to undergrads for the next 40 years.

[Ziggurat]

Of course not. But this one at least does believe that one should never use a psychological explanation for anything in economics. And he explicitly said that people who partake in lotteries do this because it is a sound economical decision and that psychology or ignorance of the actual odds do not enter into it.

There are two distinct questions here which are easy to conflate, and which I'm going to state explicitly so we can separate them.
1) Do people always buy lottery tickets for economically rational reasons?
2) Can we describe the behavior of people buying lottery tickets without reference to economically irrational behavior?

Now, if the answer to the first question is "Yes", then we should expect that the answer to the second question should also be "Yes". But what if the answer to the first question is "No"? Does that require that the answer to the second question also be "No"? It doesn't require that. The answer might be no, but maybe it's still yes. The cow isn't spherical, but the approximation still works.

OK, so what's my point? Well, my point is that maybe what your professor was trying to argue is that the answer to the second question is still yes, regardless of the answer to the first question. Without a transcript, it's hard to know for sure, and it's certainly possible that he explained himself poorly, or maybe even misunderstood the question. But it's a possibility worth considering.

(Note that I'm using "irrational" in the sense mentioned above: it's an action which best satisfies a goal. The goal itself may be irrational in the colloquial sense, but that's of no concern here.)

[Sophronius]

Yes, maybe. That is the kindest interpretation I could come up with, myself. That doesn't explain the loud scoffing at the mere mention of psychology or behavioural economics though.

Anyway, while it is possible that such a model could be "good enough" when it comes to predicting behaviour, there is no way that such a model would adequately explain why people engage in such behaviour. Predictive value is far from the only thing that's important for a model. What's just as important is the conclusions that can be drawn from it, especially with regards to the implementation of new policies bases on such models. That's why I don't like it if an economist claims that people who take part in lotteries must just have differently shaped indifference curves, and act as if that explains everything.

[Ziggurat]

Anyway, while it is possible that such a model could be "good enough" when it comes to predicting behaviour, there is no way that such a model would adequately explain why people engage in such behaviour.

Sure. Economics alone can't provide us a priori determinations of people's preferences. One may be able to deduce them based on their actions, and that might be enough, but that doesn't necessarily help us if the question regards something new or the existing data isn't good enough to make that determination.

Predictive value is far from the only thing that's important for a model.

It's the primary value, and the easiest part to test.

What's just as important is the conclusions that can be drawn from it, especially with regards to the implementation of new policies bases on such models.

I don't think that's separate from a model's predictive power, I think that IS a model's predictive power. What does the model predict will happen if we do this, and is the model's prediction reliable?

That's why I don't like it if an economist claims that people who take part in lotteries must just have differently shaped indifference curves, and act as if that explains everything.

It might explain (ie, successfully predict) all their actions, but if you're interested in why the curves are the way they are, then yes, economics alone isn't going to cut it. So I'd agree that sensible economists should recognize the importance of psychology, even if they don't want to include it explicitly in any of their modeling but only implicitly through preference curves, etc.

[Sophronius]

Fair enough. I suppose it isn't so much the model I have a problem with as the professors interpretation of it.