Polite fiction
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A polite fiction refers to a social scenario where all participants are aware of a truth, but to avoid conflict or embarrassment, all pretend to believe in some alternate version of events. It is closely related to euphemism, where a word or phrase that might be impolite, disagreeable or offensive is replaced by another word or phrase that both speaker and listener understand to have the same meaning.
An example would be of a man who goes out drinking, but tells his family that he is merely going for an evening walk to enjoy the night air. Even though everyone knows he will only be walking as far as the bar and will come home drunk, they all pretend that he really is going out for a walk, and pretend not to notice his drunkenness when he returns.
Just as euphemism can slip into doublespeak, polite fictions can slip into denial. This is especially the case when the fiction is actually meant to fool some observers: outsiders, or children judged too young to be told the truth. The truth then becomes "the elephant in the room"; no matter how obvious it is, the people most affected pretend to others and to themselves that it isn't so.