Confabulation.

An unusual word.
It appears to have two meanings: one of them used mainly by psychiatrists and psychologists.
For the lay person, its precise meaning may not be entirely clear.
To quote from the definition at dictionary.com, a confabulation is:
n 1: an informal conversation
2: (psychiatry) a plausible but imagined memory that fills in gaps in what is remembered
It is possible to gain some insights into the phenomenon from a recent story on Radio National:
"...Last night you went to a party. The music and food were excellent – it was a great night out. But there's a problem.
People tell you you're in hospital and that there was no party.
But you remember it, so how can your memory be wrong?
Welcome to the world of confabulation – the unintentional retrieval of false memories and false perceptions.
People who confabulate experience their false memories as true.
It's a rare and enigmatic condition.
Dr Martha Turner and Dr Katerina Fotopoulou disentangle some of the confabulation puzzle..."
Confabulation - Unscrambling an enigma.
http://www.abc.net.au/rn/science/mind/stories/s1479639.htm