Acharya Prashant explains that dreams and waking life are both states of the mind. He clarifies that nothing can appear in a dream that is not already present in the mind during the waking state. The mind is a single entity, and dreams are simply experiences drawn from what is already stored within it. He challenges the common notion of 'reality' by pointing out that when one is dreaming, the dream feels completely real, just as the physical world feels real when one is awake. Therefore, what a person considers 'real' is entirely dependent on their current mental state.