[Cybiote]

9.9 times out of 10, I'd be in strong agreement with you. This time however, I think the use of the term "dream" is not as egregious as would be typical. When we dream, we often believe we're conscious and multiple senses will seem to corroborate this. It must be the case that we're interacting with a generative world model. Hippocampal replay is hypothesized to, in part, facilitate what their model is doing when they call it dreaming.

Hallucination on the other hand, is a less defensible use here. Hallucination refers to when predictions overwhelm sense input. Since their agent was not behaving in a way uncorrelated with its inputs, such as its predictive model overriding input data, it doesn't qualify as hallucination.