Hallucination are not generalization beyond the training data but interpolations gone wrong.

LLMs are in fact good at generalizing beyond their training set, if they wouldn’t generalize at all we would call that over-fitting, and that is not good either. What we are talking about here is simply a bias and I suspect biases like these are simply a limitation of the technology. Some of them we can get rid of, but—like almost all statistical modelling—some biases will always remain.