Is what we consider the fashion of past decades what fashionable people wore then, or what the majority of people wore then?

It's a bit impossible to answer this, due to the nebulousness of "we". Does it mean present-day humanity as a collective whole, including fashion historians? Does it mean the average person on the street? Does it mean you and your circle of acquaintances? The fact is that there are a lot of different levels of understanding out there.

In general, I would say that most people who haven't studied the subject do think of the most fashionable extremes when considering past decades - or they even think of stereotypes that have more basis in retro memorabilia or pop culture. The 1920s are a pretty perfect example: in the earlier years of the decade, the fashionable might wear rather elaborate dresses, long skirts, and kind of fluffy hair, some of which would come in again in the later years, but people often think of clothing of the entire decade as short, unshaped "flapper dresses". But then, on the other hand, these are all examples of what "fashionable people" might wear rather than the average woman, which is the next layer down. Home sewing patterns, which were more commonly used than they are today, show very similar designs; magazines like McCall's and the Delineator came out every month with new patterns that could be rather elaborate. Photographs of everyday individuals also show clothing that generally adheres to fashionable lines.

What is sometimes difficult to understand is that there isn't "fashion" and "normal" - what's fashionable influences what's normal. It's likely that if someone fifty years in the future were to look at a picture of you in an outfit you consider not fashionable, they'd actually be able to place you to this decade. When it comes to the 1980s and 1990s, there are thousands of primary sources in the form of street photography and home photos and videos (and while we normally don't allow anecdotal evidence, I'd point out that probably more than half of the people alive today were old enough during these decades that you can trust their memories of what they and their friends wore), so we can very easily see what the average person was wearing at that time.