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The re-use of the "c" as a soft c in "hallucinate" and then a hard c in confabulate is confusing, and probably affecting the uptake of your neologism.

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Yes, it would probably have to be halucinfabulation for purely phonetic reasons.

Maybe if I added a hyphen? "halluco-fabulation"?

would lead to hafabulation. Still not acceptable in my view - confabulation is clearly the correct term

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