There is a photo that shows the head appearing at the top of the funnel in Francis Browne's album, so Beesley wasn't imagining it. The onlookers may not have known the fourth funnel was a dummy. This would have added to their surprise. The significance of the story probably grew after the sinking.
Curiously, at the end of Olympic's maiden voyage, passengers appeared at the top of the fourth funnel and merrily waved their hats to the onlookers. How they got there is anybody's guess. As Olympic didn't sink, nobody saw anything significant in their antics.