Middle and late stage dementia patients are basically in a constant state of confusion. The human mind can't handle being confused all the time, so it will make up stories that make their world make sense. Once they're at that stage, it's kinder to just let them live in that world, rather than pulling them back into confusion.
When my mom used to take my grandfather with dementia out to lunch, he would always insist that he'd been to that restaurant before, even if he hadn't. It was his way of convincing himself something was familiar, limiting that perpetual confusion.
From my own experience, I explain psychosis as someone trying to tell me a cloudless sky is pink. I've known the sky is blue my entire life. Everyone knows the sky is blue. Who is this bizarre person who thinks otherwise?
On top of that, humans tend to double down when challenged. Fighting it just doesn't work. Their memory is gone, so any progress you've made is undone very quickly. If you don't understand what is happening, you're going to lose your mind too.