It is in the nature of denial that one is unaware both of what is denied and of the denial itself. Only when denial is relinquished does one realise that the it was both real and voluntary.
Just because a person in denial wouldn't know it doesn't prove that I was in denial, it just means that you have a theory that's unprovable because you've set yourself up so that any evidence at all, both positive and negative, makes you believe that you're right.
You're right, the theory is unfalsifiable (for now at least).
However, I have argued for it, and I believe if offers the best explanation for the nerd-bully phenomenon. Bullies can't really pick on people who are simply mistaken, they can only pick on people who are (at some level) ashamed of themselves. [See my reply to zackattack for more.]
I'd like to stress that all this doesn't make bullying any less wrong or less damaging for all concerned.
Bullies can't pick on people who are simply mistaken?
Bullies can pick on anyone they choose. In my school they picked on everyone - including each other. The ones they continues to pick on were the ones that didn't fight back.
If you study bullies carefully you will notice that they are continually probing potential victims for the right kind of emotional response (prior to any further verbal or physical abuse). If they don't elicit one they move on to new targets,
Whereas there are people who aren't picked on by bullies, despite having never fought back. And I don't think they are necessarily the most popular individuals (although such people do fit into that category).