There are 3 major competing ideas of rationality/irrationality in economic theory.

There are 3 major competing ideas of rationality/irrationality in economic theory.

1. Mostly applied by neo-classical economists which assumes rational actors are at play. That people when they have access to information required to make what is deemed a ‘rational’ choice will pursue their own interests and act accordingly, and of paramount importance to all their fancy math is that they will act predictably, and this view of homo-economicus is absolutely necessary for the type of planning that most mainstream economists like to engage in. It of course also provides an endless justification for their own profession. There is only marginal utility in this view and what it occasionally gets right is just that in some cases, the value judgments of the economists line up with the aggregate effects created by the value judgments of the actors in question making real world decisions.
2. Mostly applied by behavioral economists, is the observation that people in fact do not always act rationally. That people are full of ‘biases’ and do not act in predictable ways. Although this often still leads to many trying to seek top down control of society to direct people to make decisions that are in their own purported best interests as determined by the behavioral economists who have created a laundry list of hundreds of alleged cognitive defects. The challenge with this theory is that the values of the economists are again externally placed onto the actors in question. And when people choose bad methods to achieve their stated goal they are by default labelled as ‘irrational’, or stated to be seeking the wrong goals due to what they label as ‘cognitive biases’. This is in fact, a fallacy on its own because its predicated on a false axiom that people are either irrational or rational in working towards their goals. What I like about the behavioral economists is that they are of course thinking critically and rightfully of the above view of the classical economists and showing that obviously people do not act in a perfectly predictable manner. Daniel Kahneman would be the most popular person of this general view, a brilliant statistician.
3. A very uncommon outlook is one that I think is the most consistent view of human behavior in economics to date, and its fairly old. The origin of this line of thought begins with Mises not only a great economist but a very original sociologist and liberal philosopher who produced a lot of material that I very much recommend reading. All conscious human action is purposeful, and since all purposeful, conscious action requires thought before execution all such manner of human behavior is inherently a product of rationality. It cannot be irrational by our very nature. Irrationality is reserved for the unconscious un-thinking reaction to stimuli. But such irrational behavior lasts for moments, it does not make economic decisions for us. Thinking of all human behavior as purposeful and inherently rational simply means that one must adopt a radical subjectivist approach to human values, following the subjective theory of value as developed by Carl Menger. The apparent ‘irrationality’ as described by behaviorists can only be labelled as such by inflicting external values on the actors being observed, and we are unaware of the values of the actors. When someone is choosing methods ill advised for their own stated goals these goals can be independent of time preference and other values which are not available for the observer to see. Not all people are as good at pursuing their goals, not all people are as intelligent or logical as one another, not all people choose efficient methods and this too is a result of values. To state such apparent failings of individuals to achieve their ends as simply ‘irrational’ is a very anti-human view. The idea that 3rd party observers know better than others is to disregard the values of the actors at play and is therefore a fallacy which is inherently conducive to top down planning of the lives of such people who we think, ought to be adopting our own values. All humans are rational, its what makes us human.

A side note about Menger’s Theory of Subjective Value is that it has never been refuted, and so convincing in fact that Marx even read Menger in his later days and stopped writing because he basically knew he was wrong on his labor theory of value which was borrowed from the classical economists.