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The legend you are about to hear is true. Only the needle should be changed to protect the record.
Stan Freberg, St. George and the Dragonet

This is the hypothesis:

The work is Inspired By real events. The person listed as the author is just the literary agent for the character who wrote it.

It's a thought experiment that occurs in some fandoms — the series in question is taken to be a Dramatization. The Watsonian perspective — that the events portrayed happened — is taken, but the fan accepts that what he is watching is a television show — not the events themselves, but a dramatic re-enactment of the events for our education and entertainment. Fans will sometimes claim to believe this, though this is almost always an exaggeration.

Following from this, the writers of the series are demoted to the roles of literary agents or ghostwriters for the characters, charged to transcribe their adventures, licensed to make only such changes to actual events as are required by the practicalities of the medium and to protect the confidentiality of those involved. Which is to say, "The story you are about to hear is true: only the names have been changed to protect the innocent."

This point of view is a middle-ground between supposing what we see on-screen is absolutely real and admitting that it is just fiction. The former is plainly nuts for any fictional work, even the ones that really are Inspired By true stories; the latter makes interesting scholarly discourse impossible. Try telling your English Literature teacher that it's nonsensical to talk about Macbeth's psychological issues because he's a fictional character and just goes around Doylistically doing whatever is efficient for the purposes of storytelling. See what grade you get.

This hypothesis opens up a huge range of fannish possibilities. Perhaps the most important of these is that we can easily dismiss small continuity errors: the literary agent just cocked up a bit. It also allows us to easily dismiss certain production elements, such as a Special Effect Failure or Sister Becky, or, most especially, the Translation Convention: it didn't "really happen that way", but it's a convenience for the production crew and an Acceptable Break from Reality. Without this notion, it's difficult to talk about how it really happened as, strictly speaking, it didn't really happen at all.

This is often invoked when a visual effect is changed by the production team: the phasers didn't really change color, the filmmaker has just worked out a more accurate way to depict what they always looked like.

While this line of thought has advantages for speculation and is somewhat less silly than supposing that what we are watching is real, it walks a fine line: beyond excusing production mistakes, this hypothesis is occasionally extended to allow for discontinuity, supposing that what we've seen is an outright fabrication, and discarding the bits of a show's continuity that we don't like. Within fantasy gaming circles, this is also the distinction between "Lore" and "Canon": "lore" assumes certain facts are mostly historic interpretations and beliefs — much like Real Life — making them more easily subject to change, while "canon" is inarguable (read: uninteresting) and constricting to creativity and vulnerable to Ret Cons.

Also, the more elaborate the argument made using this line of thought, the more likely the arguer is to sound like he believes it, and therefore, the less sane he is liable to sound.

This notion has probably always existed in some fashion, but as an explicitly stated thought experiment, it originated with and is still most closely associated with Sherlock Holmes fandom.

Some Speculative Fiction series take this a step further, lifting a page from quantum mechanics and postulating that all works of fiction are reflections of various Alternate Universes somewhere in a multidimensional meta-space-time. Often, this will be revealed during a trip by the characters to (or from) the "real" world. Robert Heinlein's novel The Number of the Beast revolves around this idea, and he coined the term "World-As-Myth" to describe it. It is a kind of metafiction known as "transfictionality".

Many tropes are related to this; tropes such as Writer On Board or Executive Meddling imply that the "true" story was changed. Sometimes this is invoked by the work itself, suggesting the story itself was written by the main character.

This trope is sometimes confused with Recursive Canon and sometimes overlaps it. The distinction between the two is as follows:
  • If the work is claiming that it was created/transcribed/retold by one of the characters (and many first-person POV works do), then it states the Literary Agent Hypothesis.
  • If the work is claiming that some or all of itself exists as a work in its own reality (perhaps as a work of "fiction"), then it has Recursive Canon.

The only works of fiction which this cannot be applied to are the ones that invoke Undead Author, and even then...

Compare Unreliable Narrator. See also Daydream Believer, which is what you get whenever a fan takes the hypothesis too seriously.


Examples:

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     Western Animation 

Lemony NarratorOlder Than RadioLiterary Allusion Title
Life Imitates ArtMeta ConceptsLondon England Syndrome
Life EmbellishedMetafiction Demanded This IndexMedium Awareness