I grew up with a compulsive liar. He'd just go on with these absolutely ridiculous stories, and you could tell he was making things up on the fly.
Everyone just kind of put up with it. It was mildly irritating, but I think we figured it was better to let him do his thing than to call him out on his shit and make him feel bad.
I still see the guy from time to time, and he's turned out alright. He still seems to make shit up, but it's less ridiculous now. I think these people tend to have very low self-esteem, so they prefer to give you fictitious details about their life. I'd imagine that after a while it gets to the point where they will lie and lie without even thinking about doing so.