A to Z, I'll talk about the literary term, Unreliable Narrator.
A unreliable narrator in a novel is a character who either has limited knowledge of facts or insight into himself and therefore spouts suspect ideas and "facts". It can also be a character who lies to himself or others, and takes shady paths of action. This is one of my favorite literary tools when creating characters! First of all, it makes the reader really have to think things through: is this character telling the truth? If not, why not? Or, in the case where the character is ignorant or lacking information, it allows the reader to be the smart guy, to have a laugh or two at the expense of the character! Readers like to be in the know, it's a fun logics game.
Are you still fuzzy about this concept? Let me give you some specific examples. A guy might be lying to himself about how much in love he is with a girl, but the reader knows differently through careful analysis of the text, and by how the guy is acting in a way that proves what he says is emotionally untrue. Or a criminal could be trying to verbally convince someone, even himself, of his innocence.
The Book Thief by Marcus Zusak, the narrator, literally Death is the quintessential "outsider". Death is an unreliable narrator in that he is opinionated and intentionally misleads people. He tries to make sense of the human condition, without ever having been human. Arguably the most famous unreliable narrator is Vladimir Nabokov's Humbert Humbert in the novel Lolita. Humbert's mind is so clever that he makes an almost convincing case that pedophilia is just fine. Of course, the reader knows better, and determines that Humbert is quite troubled. But the uncanny magic of using the unreliable narration tool, is that we can see the character's humanity--whether it be Humbert or Death itself--seeping through all of the warped layers.
Have you ever created an unreliable narrator? In what way was your character unreliable? Do you know of other great unreliable narrators in books?