Damn, proof that even I can learn something everyday. I thought it was an over-active imagination, but I stand corrected.
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Actually, there's no such thing as an "overactive imagination". People just tell that to children and really creative adults to make them seem crazy.
But what you're talking about might be hallucinations, not just imagination. If so, then it depends on the case. Countless numbers of conditions can cause it; examples range from dementia, liver failure, and brain cancer to psychological conditions like schizophrenia, depression, and post-traumatic stress disorder. There are hundreds of things it can come from.
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I think drugs can and do cause hallucinations.