Definition
When an AI generates confident-sounding but incorrect or fabricated information. A core concern in AI deployment — mitigated via retrieval-augmented generation, human review, and constrained workflows.
Why it matters
For small business applications of AI, hallucination is the reason 'managed AI' with human oversight outperforms autonomous AI tools. An AI that confidently sends a customer the wrong price or misquotes a service can damage the business; an approval gate prevents that.