One of my nieces made up the most amazing stories.
My GF at the time actually believed them. For example, one of them was about how she and her brother were up in a tree and this deer walked by and they jumped down on it and tried to ride it. She was 7 at the time and it was cute. (That was the last straw for me for the GF, but that is another topic..)
But, at some point, it has to stop. And it did.
It becomes pathological when the deception leads to others or the liar acting on the information that is not true. Some kids get let down so much that they no longer perceive the value of truth and the trust it engenders versus the lie and the pain in enables.
If the child is raised in a trusting home and the parent calls the child out on the fibs and half-truths, then they will get the picture.
When I fostered kids, most of them sooner or later remarked, "I wish Mom (or Dad) did what they said they were going to do like Mr Austin." For the boys, this was enough to gain their trust and marked a turning point. Girls were different. They needed to discuss things, too. LOL.
I can recall making cogent judgements about people when I was four years old. I imagine kids do this unconsciously at an even earlier age.
