Final answer:
Living in a fantasy means that the person is daydreaming and not paying attention to reality. It is a state where the person is not fully present in the real world and is preoccupied with their own thoughts or unrealistic ideas.
Step-by-step explanation:
Living in a fantasy generally implies that a person is emotionally or intellectually immersed in a world of imagination that is detached from reality. In the given question, the correct option that defines living in a fantasy is '2) The person is daydreaming and not paying attention to reality'. This expression often suggests that one's head is filled with unrealistic ideas or a detachment from what is actually happening in one's surroundings. While fantasy can serve as a creative outlet, it becomes problematic when it interferes with one's ability to address real-life situations or differentiate between fiction and reality. This can happen when someone is engrossed in their imagination or when they escape from the challenges and stresses of everyday life by immersing themselves in a fictional world.