To be fair, I've heard it used (presumably) the same way, but I understood this to be a type of consensus that relies on an agreement by all.
From the wikipedia definition on consensus-based decision-making:
> The focus on establishing agreement of the supermajority and avoiding unproductive opinion, differentiates consensus from unanimity, which requires all participants to support a decision.
As I see it, for humans usually consensus on a topic is:
majority agree
minority disagree...
but in lieu of anything better being accepted by the group, they accept a perceived suboptimal outcome for the sake of getting a beneficial outcome at all. IE it's not great, but it's good enough.
Going back to the neighbor example, someone being loud at 2am is a lack of consensus. In order to be productive as a group, you need consensus to be quiet when people are sleeping.
That aside, consensus always has a particular domain of applicability, and by decentralizing, you make that domain smaller - and thus make consensus easier. Federation can be used to replicate this process on as many layers as needed for decentralized organization of larger societies.
Invite people to abandon their preferences and then organize those people so they show the world how many more needs it meets than not doing it. In particular, abandoning preferences allows the need for not to get met more easily.
but what if there's only a limited set of choices, and at least one person in the group would hate one of the available choices? What then?
At the risk of pedantry (but in this case I think warranted): consensus literally means every single person agrees.
This is as opposed to something like democratic rule, where rules can be made and enforced even if not every single person involved agrees.
I think OP is using the precise (non-colloquial) definition of "consensus" and rightly points out how unworkable that is as a governing principle. You can't get a small room of people to agree on what's good for lunch, much less matters of actual controversy.
In a precisely-consensus-driven system you'd never be able to shut your neighbor up at 2am, since definitionally at least one person involved thinks the behavior is ok.