The right hemisphere of our brain is the part which directly perceives the complexity of reality. The left brain relies on conceptualisations which can only ever be an approximation to reality. The left brain relies on new information updates from the right brain to refresh its views on what is happening. Without this input it stays stuck in the same beliefs and story lines which become increasingly divorced from on-going reality.
Confabulation is the formation of false memories, perceptions, or beliefs... as a result of neurological dysfunction (wikipedia). It leads to a situation where people lie without realising they are lying. Clearly this can happen as a result of anosognosia.
Modern humans are all dominated by the left brain, particularly in terms of thought and speech, and the right hemisphere has to take a back seat, its impressions becoming sub-conscious. Therefore we do not consciously perceive full reality. And, as part of this very scenario, we are not habitually aware of this limitation. We could all be said to be suffering from partial anosognosia. This is why we all confabulate to some degree. This was highlighted in an article in New Scientist in October 2006 (available at http://www.newscientist.com/.
http://www.newscientist.com/article/mg19225720.100-mind-fiction-why-your-brain-tells-tall-tales.html
to read more.
While we have an operational right hemisphere some information can filter through to the more limited capacity of the left. Dreams and moments of insight give particular opportunity for this to happen (see 'The Evolutionary Biology of Self-Deception, Laughter, Dreaming and Depression: Some Clues from Anosognosia' V. S. Ramachandran.
http://www.beyond-belief.org.uk/sites/beyond-belief.org.uk/files/Ramachandran.pdf
