I've read all kinds of ideas on it. Native tribes even have different ideas between tribes, and even within branches of tribes. Everything from evil spirits that play tricks, do harm, steal children, etc, to magical creatures who bless those who see them with good fortune. I've recently been reading a treatise on the Celtic fae written at the turn of the century and it seems that even within the Celtic countries, (Normandy, Wales, Ireland, Scotland) there are differing opinions on what it means to see a gnome.
Personally, I think they make mistakes and get seen, and I think children are more open to seeing them and recognizing what they've seen. Adults find it easier to rationalize- "Oh, it was a weird moonlight shadow on a rock." -or whatever we can tell ourselves.