Section 2.1 What is rationality?
Perhaps it is best to start with what rationality, as it is applied by economists, is not. The assumption that a decision maker is rational is not equivalent to saying that they are a flawless computing machine with a rigid, preordained set of preferences which never change. Nor does rationality presume that individuals care only about themselves, acting in a manner that strictly maximizes their own profit or consumption.
Rather, the assumption that individuals are rational requires that they have a set of consistent preferences which allow them to evaluate the options they face. Additionally, rational individuals will not consider irrelevant information, such as a cost that has already occurred or the attractiveness of the salesperson, in their decision making.
Let’s consider an example, namely, the decision of what to have on a given day for lunch. A rational individual considers the underlying costs and benefits of each of their lunch options in weighing this decision. Say you eliminate all other options than those at the SUB cafeteria due to them being too costly relative to their benefit. So you head to the SUB and consider your options. In order for your choice to be rational, it simply needs to be consistent with your personal food preferences and provide the most well-being relative to the cost. It could be perfectly rational for you to buy a chicken burrito even if the SUB were giving cheeseburgers away for free if that aligns with your preferences. If you arrive to see that a single chicken burrito will now cost you half a semester’s worth of dining dollars, it is not likely rational to buy it anyway because, "I always get the chicken burrito." (Opportunity costs, right?)
If this admittedly absurd example of irrationality seems too far fetched, consider another, more subtle, departure from rationality. In the above lunch example, let’s say you prefer the chicken burrito to the cheeseburger. If the SUB were to suddenly add a soy cheeseburger, something you like less than both the burrito or the cheeseburger, it would be irrational for you to suddenly decide to go for the cheeseburger. ("At least its not a soy burger.") This would involve an irrational change in preferences because the introduction of the inferior option is irrelevant to your burrito/cheeseburger decision.
An additional dimension of the rationality assumption is worth mentioning. In order for an economic model to be useful in describing behavior or making predictions, it is not necessary for the assumption of rationality to be strictly true at all times in all situations. If it represents a simplifying assumption which largely reflects the actual choices we are seeking to model, then it serves to make our model more useful, not less.
To summarize, generally speaking, when an economist refers to a decision as rational, they mean that it represents an individual choosing the option which maximizes their well being, considering the relevant costs. There are few constraints on what contributes to the well being of a rational individual, only that it is consistent with their personal preferences.
