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[ ai glossary · risk, security and compliance ]

AI hallucination

What is an AI hallucination?

A hallucination is output from an AI model that is fluent and confident but false or unsupported: an invented fact, a made-up citation, a policy that does not exist, or a number that appears nowhere in the source. It happens because language models generate plausible text rather than looking facts up, so it can be reduced but not fully eliminated.

01why it matters for a business

Hallucinations are the main reason AI output cannot be trusted blindly, and they have already had real consequences. In the widely reported Mata v. Avianca case in 2023, lawyers were sanctioned by a US federal court after filing a brief containing case citations ChatGPT had invented. In 2024, a Canadian tribunal held Air Canada responsible for incorrect bereavement fare information its website chatbot gave a customer. In both cases the organization owned the error, not the model.

For a business, the practical response is design, not hope. Ground answers in your own data through retrieval, require citations, instruct the model to say when it does not know, check outputs against source systems wherever numbers or commitments are involved, test with AI evaluations, and keep people reviewing anything high stakes.

02what it looks like in practice

A distributor's AI assistant drafts quotes from customer emails. In testing, it occasionally fills in a volume discount the customer asked about but the contract does not include. The fix is structural: prices and discounts now come only from a tool that queries the pricing system, the model is instructed never to state a price it did not receive from that tool, and a validation step compares every number in the draft with the system's values before a rep sees it.

03common mistakes

04related terms

05where insomnia club fits

Insomnia Club's AI implementation work grounds answers in your own data and adds evaluation and guardrails, so the system is proven to behave before it reaches customers.

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