What is real? What is illusion?

The other day, I was having a conversation with friend about dreams.  My dreams are usually very vivid and I mentioned that my dreams from the previous night had felt so real that all day I kept confusing what was real with what I had dreamed.

My friend said that it is all a dream and I countered that maybe, it’s all real…

I’m not sure what the answer is and, honestly, I don’t need to know.  It does makes me wonder, though.  What really exists and how do we know if/when something does?  Does anything really exist?

I am of the mind that everything is an illusion.  That what we perceive is of our own creation.  That our brains register what fits within the realm of possibility as defined by our beliefs and filter everything else out.

In his book, Why We Believe What We Believe: Uncovering out Biological Need for Meaning, Spirituality, and Truth, Dr. Andrew Newburg writes:

Although we have neural receptors for various colours, including those that respond to “blackness” and “whiteness,” there is no neural receptor that distinguishes any gradation of gray. No one knows for sure where the experience of gray occurs, but one theory suggests that it is a concept fabricated in another part of the brain when both the blackness and the whiteness receptors are turned off. Gray, like many other colors we can imagine, is a belief construction within the brain – a form of understanding, a thought.

What does that mean?

Why do we see grey?  The above passage suggests that we see it because we believe it is there.  I was told what grey was and I believed it to be true.  Now when I see it, I identify it as such. Grey.

Grey exists because we believe it exists. Really?

This makes sense to me on some level; I don’t believe in absolutes, which means anything is possible.  However, if grey only exists because we believe it exists, then what else only exists in our thoughts?

I think about this kind of stuff all the time.  If it wasn’t so fascinating, it would be exhausting.  I hope you’ve enjoyed the tour of my thought process (and that you are now as confused and awe-struck as I am).

Does anyone else think of this kind of stuff?
So, who has answers?  Anyone?  Anyone?  Bueller?