The literal meaning of the Sanskrit word is "he passes or crosses down." It is taken from Hindu philosophy.
Just as the deity "passes down" from the higher realms of being to the simpler realm of the material Earth, so a person becomes an avatar in a simpler computer-generated reality.The first use of graphic or text virtual identities was in multi-user domains (MUDs); although MUDs were first created in the late nineteen-seventies, "avatar" is a more recent term for a virtual character.
For a "real-world" example, see the SF in the News story Church of Fools: The Coming of the Avatar?.
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