The hypothesis that hallucinators are deficient in the metacognitive skill of reality testing was tested using the methodology of signal detection theory. In Expt 1 undergraduate subjects scoring high or low on a scale measuring predisposition to hallucination were tested on an auditory signal detection task. High scorers on the scale were found to differ from low scorers on a measure of perceptual bias but not on a measure of sensitivity. In Expt 2 a similar methodology was used with hallucinating and non-hallucinating schizophrenic patients, with similar results. These results support the hypothesis that hallucinators or subjects highly disposed towards hallucination are deficient in reality testing and are therefore prone to identify imaginary events as real.