Today is a good term, coming from Psychology. We are talking about Confabulation. Doesn’t even seem like a real word, does it? This deals with how characters can sometimes create whole events that never happened, yet unaware its false. Enjoy.
It’s our way as humans to simplify things, but in doing so, you erase the nuance of the human experience, which can bring out so much about a person. This nuance is what we writers write about.