Closely related to pediophobia (a fear of dolls.)
The psychological theory:
The psychoanalyst Sigmund Freud claimed that children fantasize about dolls coming to life. Psychologist Ernst Jentsch theorized that uncomfortable or uncanny feelings arise when there is an intellectual uncertainty about whether an object is alive or not, and also when an object that one knows to be inanimate resembles a living being enough to generate confusion about its nature. Japanese roboticist Masahiro Mori expanded on Freud and Jentsch's theories to develop the "uncanny valley" hypothesis, which predicts that as a robot's appearance becomes increasingly human-like, a human will have an increasingly positive response to that robot, until a point is reached where the response changes quickly to one of repulsion. If an object is obviously enough non-human, its human characteristics will stand out, and be endearing. However, if that object reaches a certain threshold of human-like appearance, its non-human characteristics will stand out, and be disturbing. Although Mori was concerned particularly with robots, his theory has been seen as applicable to all inanimate objects that sufficiently seem as though they might be animate.
person2- Sounds like you have gnomaphobia