As in social science in general, these assumptions are at best approximations. The term is often used derogatorily in academic literature, perhaps most commonly by sociologists, who tend to prefer structural explanations to ones based on rational action by individuals.
Homo economicus bases his choices only the consideration of his own personal "utility function". To the extent that this utility function does not consider the well-being of others, Home economicus is selfish. Some believe such assumptions about humans are unethical. Economists tend too disagree, arguing that it may be relevant to analyze the consequences of enlightened egoism just as it may be worthwile to consider altruistic or social behavior.
How is Homo economicus rational? Usually in the sense that well-being as defined by the utility function is optimzed given perceived opportunities. See Rational Choice Theory and Rational expectations for further discussion; the article on Rationality widens the discussion.
Although not typically used this way, Homo economicus could probably also be used, with some degree of felicity, to critique the characters of Ayn Rand.
Comparisons between economics and sociology have resulted in a corresponding term Homo sociologicus, to parody the image of human nature given in sociological models. Hirsch, Michaels, and Friedman (1990, p. 44) say that homo sociologicus is largely a tabula rasa upon which societies and cultures write values and goals; unlike economicus, sociologicus acts not to pursue selfish interests but to fulfill social roles. Sociologicus may appear all society and no individual.
See also the discussion at Indifference curve.