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Lying depends on certain essential life skills, such as independence and emotional control. Sometime during the second or third year is when children develop these skills, however rudimentary. But it's not until they turn 3 years old or later that they really understand what they're doing when they tell a lie.
"During the preschool years, children are more capable of taking into account a listener's belief," explains Fran Stott, vice president of the Erikson Institute, a Chicago graduate school in child development. "They recognize that whoever is listening to them will react to their statements with a sense of existing knowledge." In other words, they know you won't necessarily take what they say at face value.
When a 2-year-old lies, it doesn't dawn on him that you won't believe him, no matter how outlandish his claim — such as blaming his baby sister, who can't even crawl yet, for stuffing an entire roll of toilet paper in the toilet. But by age 3 to 4, most children have figured out that you'll know they're not telling the truth in such situations, says Stott.
Children this age are more likely to answer a direct query like, "Who put the paper in the toilet?" with "I don't know." Still a lie, but more believable than the story about the baby doing it. If you notice your child answering "I don't know" to questions like this, it's a clue that he's moved on to understanding what a lie really is.
Stott advises against punishing a small child for stretching the truth. It will take time for your child to truly understand what a lie is and that you don't like lying — let alone to distinguish the "white" lies you might want him to tell (telling Grandma he loves the sweater she made him, for instance) from the ones you don't.