Sleep state misperception (SSM), historically termed paradoxical insomnia, is characterized by a marked discrepancy between subjective reports of little or no sleep and objective evidence of relatively preserved sleep. Traditional models emphasize hyperarousal, cognitive bias, and sleep–wake boundary instability, yet these frameworks do not fully explain why physiologically valid sleep is often experienced as sustained wakefulness. This paper advances a conceptual reframing of SSM as a disturbance of perceptual inference grounded in predictive processing theory. Within this framework, the experience of sleep and wakefulness is understood as an inferential construction shaped by prior expectations, precision weighting of internal signals, attentional monitoring, and memory-based reconstruction. Under conditions of low sensory precision, such as light or transitional sleep, top-down wake-like experiences. Retrospective memory further consolidates this bias, producing a coherent but inaccurate percept of wakefulness. expectations increasingly guide state classification. Hyperarousal amplifies internally generated signals, while monitoring behaviors bias sampling toward The model integrates clinical phenomenology, neurophysiological findings, and cognitive-behavioral mechanisms within a unified account and generates testable hypotheses regarding interoceptive precision, perceptual thresholds, and resistance to belief updating. Clinical implications include reframing treatment targets from sleep generation to sleep interpretation, with adaptations of cognitive behavioral therapy for insomnia aimed at reducing monitoring, modifying maladaptive priors, and increasing tolerance for ambiguity. Conceptualizing SSM as a disorder of perceptual inference situates insomnia within contemporary theories of perception and provides a framework for understanding subjective–objective discrepancy across clinical contexts.