Chatbots are conversational agents that interact with users using natural language. They were originally developed to fool humans but now have numerous applications like customer service. Chatbots work using pattern matching and predefined responses rather than true understanding. Early chatbots included ELIZA, which acted as a therapist, and PARRY, which simulated a paranoid schizophrenic. Modern chatbots like ALICE are more sophisticated and use pattern matching and databases of questions and responses. Chatbots have applications in areas like education, customer service, and information retrieval. However, they are limited by their inability to truly understand language and context.