The 'method_missing' hook is a metaprogramming technique in Ruby that catches calls to methods that do not exist. When a method is called that isn't defined in a Ruby class, the 'method_missing' method is invoked. This allows programmers to dynamically define how the program should behave when undefined methods are called, which can be used to create flexible and powerful scripts for penetration testing. However, overreliance on 'method_missing' can lead to obscure code and potential performance issues if not used correctly.