This means to make interpretations or assumptions, and it comes in two flavours:
Mind reading. As it sounds, e.g. “They didn’t smile at me when we were introduced, because I freak them out. ” [Can you read minds? If not: insanity].
Fortune telling error. As is sounds, e.g. “There is no point trying any more strategies, the fact is people don’t like me and I’ll never have close friends.” [Can you see the future for sure, if not: insanity].
When you start recording and writing down your stream of consciousness, you find some distortions are more common than others; and I think these two errors are two of the most common. Of course, you can make educated guesses about what people might be thinking or what might happen, but the distortion is when that is taken to be more than a guess, and a guess is as good as a wrong without evidence, the fact is that you simply don’t know, and for your stream of consciousness (and so you) to be based on things you don’t know to be true is… yes. You learn quick, huh? Insanity.