In economics, "rational expectations" are model-consistent expectations, in that

agents inside the model on average assume the model's predictions are
valid.[1] Rational expectations ensure internal consistency in aggregate stochastic
models. To obtain consistency within a model, the predictions of the future value of
economically relevant variables are optimal given the decision-makers' information
set and model structure. The rational expectations assumption is used especially in
many contemporary macroeconomic models. Rational expectations does not imply
individual rationality and should not be confused with rational choice theory, which is
used extensively in, among others, game theory.
Since most macroeconomic models today study decisions over many periods, the
expectations of workers, consumers and firms about future economic conditions are
an essential part of the model. How to model these expectations has long been
controversial, and it is well known that the macroeconomic predictions of the model
may differ depending on the assumptions made about expectations (see Cobweb
model). To assume rational expectations is to assume that agents' expectations may be
wrong, but are correct on average over time. In other words, although the future is not
fully predictable, agents' expectations are assumed not to be systematically biased and
use all relevant information in forming expectations of economic variables.
This way of modeling expectations was originally proposed by John F.
Muth (1961)[2] and later became influential when it was used by Robert Lucas, Jr. and
others. Modeling expectations is crucial in all models which study how a large
number of individuals, firms and organizations make choices under uncertainty. For
example, negotiations between workers and firms will be influenced by the expected
level of inflation, and the value of a share of stock is dependent on the expected future
income from that stock.
Deirdre McCloskey emphasized that "rational expectations" is an expression of
intellectual modesty: "Muth's notion was that the professors [of economics], even if
correct in their model of man, could do no better in predicting than could the hog
farmer or steelmaker or insurance company. The notion is one of intellectual modesty.
The common sense is "rationality": therefore Muth called the argument "rational
expectations"."[3]