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There is a lot of debate on whether or not consumers and investors are rational. Unfortunately, I haven't seen much qualification for what is called a rational consumer. What are the requirements that must be met for us to consider a consumer to be rational?

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  • $\begingroup$ Whoops I think this is a dupe. economics.stackexchange.com/questions/8344/… $\endgroup$ – EconJohn Aug 7 '17 at 20:23
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    $\begingroup$ It doesn't seem like a real dupe to me. The other question and answers are more technical. This set is better for beginner economists. $\endgroup$ – chicks Aug 10 '17 at 17:24
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In consumer theory, preferences are called rational if they are transitive and complete. Some nomenclature: An alternative A is weakly preferred to another alternative B, if you either like A more than B or you are indifferent between the two. Transitive means that whenever an alternative A is weakly preferred to alternative B, and B is weakly preferred to C, then A is weakly preferred to C. Complete means that for any two elements A and B of the set of possible alternatives, either A is weakly preferred to B, B is weakly preferred to A, or both. In short, preferences are rational when they are defined for all possible alternatives, and when they don't contradict each other in obvious ways.

Rational expectations are a different beast and are specific to different models. Agents in a model have rational expectations if they use the model to form expectations about the future. This means that expectations are consistent with the model/theory in question, and it also means that every rational expectations model has a different "theory" about how people form their expectations. Rational expectations are as much a concept to solve dynamic models as they are an assertion on people's behavior. They are commonly used because they make sure that people are not systematically wrong about their beliefs, and they keep models' properties from being driven by more arbitrary assumptions on how people form expectations.

I don't think there is a lot of thought going into alternatives to rational preferences and most people are content with making the assumption that preferences are rational. There is a big literature in macro and finance on relaxing rational expectations assumptions. A lot of people work with models of bounded rationality, in which agents use a simpler approximation to the true model to form expectations.

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This answer is partly from HRSE in his answer to Are monotonic and continuous preferences necessarily rational?

I'm posting this as an answer for a more technical definition.

Rationality

Rationality consist of the following properties:

Completeness

A preference relation is complete, if for all $x,y \in X$, we have $x\succsim y$, $y\succsim x$, or both.

Transitivity

A preference relation is transitive, if $x\succsim y$ and $y \succsim z$ imply $x\succsim z$.

Continuity

A preference relation is continuous if for all sequences ${(x_i,y_i)}_{i=1}^{\infty}$ converging to $(x,y)$ with $\forall i: x_i \succsim y_i$ we have $x \succsim y$.

Monotonicity

A preference relation is monotone, if $x \geq y$ implies $x \succsim y$.

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A consumer is rational if he decides for the option that maximizes his/her utility.

When studying the bachelor for Economics, in microeconomics class, the teacher would always tell you that it is assumed that consumers are rational, meaning that they maximize their profits based on their utility payoffs. The teacher would state that the utility expressed in currency, and the student compares this to the cost of several homogeneous goods, choosing the cheapest that maximizes the payoff and consumer profit.

Economics graduates often forget that in real world there are rarely homogeneous goods and consumers cannot easily express their utilities.

So, when I'm buying a 3\$ water in a coffeeshop instead of buying the same water for 1\$ in the supermarket next door, my utility of buying together the water is different, therefore i'm rational even if I spend more to buy an apparently homogeneous product - because i'm buying the service, or because the time saved amplifies the utility of the water.

Besides this, take a look at the concept of bounded rationality.

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  • $\begingroup$ "Economics graduates often forget that in real world there are rarely homogeneous goods and consumers cannot easily express their utilities". what about expressing Ordinal utility? market surveys do this all the time and capture this concept. $\endgroup$ – EconJohn Aug 14 '17 at 17:34

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