Why do children perpetually live in a world of their own making - a world that is both fantastic and unreal? Why do they constantly create imaginary universes with their own set of characters and societal rules?

For years, psychologists have been trying to understand this tendency but have failed to give one definite reason for it. There have been not one but many and varied explanations with the result that some say fantasy is bad and some say that it's good. There has been no consensus on the true reason or reasons. No research has proven that imagination and fantasy are therapeutic for children just as no research has shown that they are bad for them.
Children begin dreaming sometime in the first year of their life. Young children have a limited ability to distinguish dreams from reality or fantasy until they approach school age. Through childhood and adolescence, children's dreams tend to reflect representations of typical developmental issues, wish fulfilment themes, and environmental stimuli.
Unlike adults, children don't use fantasy and dreaming to escape from the realities and pressures of their lives. They lead more or less sheltered lives and thus have practically no reason to escape. Happy and secure children are just as likely to be immersed in a dream world, as children with an unhappy home or school life. So, what could the reasons for this habit be? One explanation could be that children by nature are designed to learn, and since they lead sheltered lives, they are desperate to understand the outside world. They construct their own theories to explain a particular situation or occurrence and like adults, they continue revising these theories as new parameters are added. It is all a part of the learning process. Without imagination and daydreaming, there wouldn't have been any scientific development and we would still be living in the Stone Age.
Another explanation for daydreaming is boredom and loneliness. Imaginary friends and situations help them entertain themselves and others too.
Imaginary worlds of children have far-fetched premises but are extremely logical and consistent. That's why books by Lewis Carroll and J.K.Rowling are so effective and popular. Children are different from adults because they have the freedom to imagine and learn freely. They are not constrained by practicality, as adults are most of the time
While daydreaming should not be discouraged, it can often be distracting to the point that it is detrimental for the child. He may fail to concentrate on a given task because he is in his own world and if this habit continues, he may lose both physical and social contact with the real world. This may lead him to become withdrawn which in turn could lead to personality problems. A lack of concentration would also affect a child's studies and grades, which in turn would lead to its own set of problems.
If you see that your child's imagination and day dreaming is getting in the way of his regular activities, try and reduce or stop this tendency at once. You can try • Reducing the amount of television that he watches. This medium helps your child to escape from the mundane realities of his everyday life. It also introduces new characters, graphics, and plots which he could reproduce in his daydreams. Sometimes, television could also over stimulate the imagination to the point of keeping a child awake at night and the lack of sleep in turn leads to a lack of concentration.
Increasing the amount of physical exercise your child gets. Often, the lack of adequate physical exercise is compensated by a more than adequate mental exercise which in turn increases a child's daydreaming tendencies