If a person lies to himself - the most appropriate word is delusional.
The person can be described as in a state of delusion where the person is filled with false beliefs.
If the person is imagining monsters attacking him, or constantly frightened by these delusions, the person is said to be having hallucinations or hallucinating.
If the person is imagining someone else, like the police or gang members conspiring to injure him, the word is persecutory delusions.
If a person imagines he is a powerful person, but is not, the appropriate word is grandiose delusion.
If a person cannot accept the truth and thinks to himself otherwise - the most appropriate word is self-denial.
If a person repeats the lie he saids to himself to someone else, that person is a pathological liar or compulsive liar.
If a person is living by his own delusions, he is said to be living in his own fantasy world.
If you do meet such a person, you might or may want to confront his erratic or unusual behaviour and tell him what he thinks, is not true, and needs to correct his thoughts. That person may be a drug addict or mentally ill, who needs anti-drug treatment.