I don't think it's really making things up, more like that the brain is great at pattern matching, and at filling in the blanks when it doesn't get all of the information. The basis for optical illusions, even mp3 compression. So if there's no one around, but you're used to people being around, your brain figures out how to interpret random noise as a person.

It goes along with the feeling you get when you arrive at a place you know via a route you don't, and suddenly realize that you know where you are. A moment where your mental image of where you are quickly adjusts itself. A fun feeling.

Of course if you see little green space people, you might have a problem somewhere...