> in some sense, hallucination is all LLMs do. They are dream machines.

If you understand that, then the term "hallucination" makes perfect sense.

Note that this in no way invalidates your point, because the term is constantly used and understood without this context. We would have avoided a lot of confusion if we had based it on the phrase "make shit up" and called it "shit" from the start. Marketing trumps accuracy again...

(Also note that I am not using shit in a pejorative sense here. Making shit up is exactly what they're for, and what we want them to do. They come up with a lot of really good shit.)