If your visual cortex is damaged, can you see in your dreams?

I think a more likely explanation is that the brain is confusing these patients. Normally the brain signals if something is important for you, or interesting and you will try to fit this in your worldview. It could be that these people their brains are constantly telling them something is important, and in order to fit all this into your worldview you would have to come up with ridiculous theories.

This has always made sense to me too. An important job of the brain is to take a confusing array of sensory input and create a coherent narrative out of it. It's not hard to see how this could go awry and, like you say, cause certain cues to be mis-weighted. From dealing with a friend who suffers from schizophrenia, it seemed like above all else, he lacked that undefinable gut instinct that allows us to separate a plausible scenario from something that just can't be true. I found that a lot of his delusions were actually somewhat plausible to somebody who didn't know the situation. Neighbors talking shit is something that happens every day. But then when I learned more about the situation I started to realize something was off, and that what he was saying just couldn't be true. Interestingly, it also seemed to work the other way. The first symptom I ever noticed (and I had been friends with him since before his schizophrenia developed) was that he became extremely skeptical about anything I said, even if it wasn't something that somebody would ever lie about. I casually mentioned a story about how a truck crashed at a rotary near my house a few years ago and damaged a house and he seemed almost offended that I would try to get him to believe such a story. I thought he was just busting my balls but I got the same reaction to two other completely ordinary, believable stories. It seems like one thing that is 'mis-weighted' in the case of classic paranoid schizophrenia is the sense that somebody else is deceiving you. It's a delicate instinct we've evolved to avoid getting tricked by others but some people just have it dialed up too strong, and it must be terrifying to live like that. It hurt me a lot to see somebody who clearly once trusted me a lot have to suffer the feeling that I was lying right to his face.

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