The point of argument is to persuade, and I don't think I can persuade you to view fiction in a different light, but the statement, "...all works of fiction work to undermine actual human stories, distorting and misleading to the silly psychological whims of the author..." runs counter to all human experience. Did Shakespeare undermine 'actual human stories'? Milton? The Psalmist(s) of the Bible? Were they driven to write by 'silly, psychological whims'? Do you believe, then, that all fictional literature and--possibly by extension--all art: painting, music, sculpture, et al, undermine the 'actual'; that is, distort and falsify, rather than contribute to our understanding of reality?
I suggest you pick up a novel commonly considered to be a great piece of literature--Twain's Huckleberry Finn, say, or anything fictional not written by Ayn Rand, and give it a try. The great novelists seek to share a truth about the human condition with their readers, and know that a bare recounting of facts does not get the point across as effectively as a work of fiction. Jesus spoke in parables for a reason.
Whatever their contribution, my and your human experience is more important. Sitting down to a bowl of Cheerios is reality. Anything they produced, however beautiful, is artificial and less valid.
Only recently I've come to reexamine the value of such illusions, however. I used to think "illusion=evil" (therefore all fiction must be evil, as it's an illusion). I had some crazy dreams, thinking how we're all blood and guts inside, so all of our beauty is external and skin deep. By that logic, our inners function to support our external "art". All these questions began when I asked myself why I'm not attracted to girls for their inner beauty, which I know is morally superior, but I keep chasing pretty girls instead for some reason. I may be connecting unrelated things, I suppose, but my struggle is to reconcile completely stark contrasts of value-- lies are so abhorrent, but all media is a lie.. it's technology creating an illusion. Our bodys do the same- organs producing illusions that attract others for the 'wrong reasons'. That's what I see in art- the artist seduces the reader with a falsehood of oil/film/words, etc. But that's all "skin deep".
The real beauty is found in mundane daily life, and can't be equaled by artists. Your experience and mine are more wonderful and didactic than anything Shakespeare ever wrote. (And it doesn't mean he is awful, rather that our lives are truly great.)