Simulated reality is the philosphical hypothesis that what we perceive to be reality could actually be an artificial simulation, such as an extended hallucination or an elaborate computer program. Although the concept has a basis in philosophy, it is more often explored in science fiction, perhaps most famously in The Matrix.
 Origins of the idea
The concept of simulated reality rests on older concepts such as solipsism, and the conundrum that we can never truly know whether the evidence of our senses and memories are merely illusions. The simulated reality hypothesis applies existing or hypothetical technology as possible explanations for the illusion.
The simulated reality hypothesis raises further questions of who created the "false reality" and why, as well as questions about our existence in the "true reality" outside the simulation. In some variants, humans have a similar nature outside the simulation, but are being controlled through the use of simulated reality. In others, we are actually no more than a brain in a vat being fed stimuli, or even have no corporeal existence at all. In some fiction, such as The Matrix, it is possible to "hack" the computer programme and hence manipulate the simulated reality, effectively giving those who do so the equivalent of supernatural powers.
The idea is also sort of related to time travel and how to achieve such a thing in the real, practical world. Rather than sending someone to the past, this hypothesis states that it is more practical to bring the past to us, via a simulation. As a sufficiently powerful and accurate simulation is indistinguishable from reality, a simulation allows time travel to be effectively obtained. This also has important repercussions for why we would be living in a computer simulation made by a higher intelligence. A single, highly advanced civilization would run many simulations of its history in order to study it; as a result the number of individuals in that civilization who are simulated would outnumber the real individuals many thousands of times. Simply playing the odds generated by this from this idea concludes that we may well be simulated by a future version of ourselves.
 The simulation argument
The simulation argument is a thesis set out in a 2003 paper by Nick Bostrom, a transhumanist philospher, in which he argues that the simulated reality scenario is correct, and that the world that we see around us is merely a computer simulation.
This paper begins by arguing that at least one of the following propositions must be true:
- The human species is very likely to go extinct before reaching a “post-human” stage;
- Any post-human civilization is extremely unlikely to run a significant number of simulations of their evolutionary history (or variations thereof);
- We are almost certainly living in a computer simulation.
The paper then goes on to argue that as there is a significant chance that we will one day become post-humans who run ancestor-simulations, therefore it is almost certain that we are living in a computer simulation. Since 2003 there has been a lot of interest in the idea, especially with the online community.
 Thought experiment
Of course, simulated reality is used more as a thought experiment, or a narrative twist in fiction, rather than a theory that anybody genuinely believes in. The key point of the hypothesis is that it would be impossible for us to to tell for certain whether the reality we encounter is "really real".
Although a simulated reality is unfalsifiable, an answer can be readily obtained by using Occam's razor, since any explanation of the world around us that involves evil alien overlords having wiped our memories and coercing us into participating in a gigantic MMORPG for some unknown nefarious purpose is a good deal more complex than just trusting our own senses. The idea is also recursive, as even if you became aware of being simulated, you couldn't tell - in a sufficiently advanced simulation - if this outside world was also simulated, and that the alien overlords or future humans were also being studied within a simulation and so on.
Still, it's no less plausible than young Earth creationism and has, at least, provided us with some good stories.
 In popular culture
Simulated reality as a concept often gives producers of fiction free reign to do anything they like. Total Recall featured the idea of implanted memories that were simulated and the conclusion of the film is often interpreted as being deliberately ambiguous as to what was real and what was simulated. The Matrix series is undoubtedly the most commonly cited film that has been inspired by the concept of a simulated reality. It could be argued that the film has also inspired an increasing interest in the hypothesis, bringing an otherwise obscure and abstract idea into the public conciousness.
Star Trek, whenever the producers feel the need to go on location shooting or to use period costumes, uses the holodeck. In this case the tables are turned and it is not that we are simulated, but that we are the ones simulating other characters, worlds and scenarios. Sometimes the simulated characters are sort of aware of their situation, such as when Isaac Newton, Albert Einstein, and Stephen Hawking appeared together in a card game. Frequently the holographic characters are completely oblivious to the fact that they are a computer simulation. This is often exploited for plot purposes when the simulated characters discover their nature and rebel or take control of the program.
 What this means to you
Nothing. However one positive avenue of exploration is to attempt to perform the real world computational equivalent of side channel attacks on the universe. In cryptoanalysis, side channel attacks are forms of cryptoanalysis that attempt to get information about the underlining hardware/logic implementations of a system. A timing attack for example measures the time it takes for various computations to be performed which can provide various kinds of data to very clever people.
The problem is that technically, this is what we do already. Every scientific experiment is nothing more than running an "algorithm" and every data collected is nothing more than the information given back by the system, which we attempt to logically put together into a coherent paradigm regarding the underlining logic of the universe.
Some people might get distressed at the suggestion that everything they know might be wrong. If this is you, don't sweat it. Just keep going on and be happy because the fact is it really changes nothing. Even if it were proven beyond any doubt that your entire reality was just an illusion but the simulation remained intact and you had no way out of it, just take comfort in the truth that even as an object in an artificial world you do still very much exist. You think, therefore you are, right?
If that's not enough, go see a simulated therapist about some simulated therapy and simulated drugs. If you're just a construct you might as well be a happy construct.