The following is taken from http://www.gamespy.com/articles/561/561382p3.html
Sounds a lot like what you were interested in (found it looking up other stuff) and though I never played it, it sounds pretty clever.

The brilliance of Eternal Darkness wasn't in the storyline, though. It was in the way that the game played with the player's head. Every creature you encounter drains sanity from the player. This isn't just a game stat, though; it actually affects how you, the player, interact with the game. As your sanity decreases the game's sound effects and music are gradually replaced by sinister voices whispering to you. Illusionary characters and rooms appear on the screen and sometimes it seems as if the game has crashed or your entire inventory has disappeared. As you progress through the game, you will eventually stop trusting your senses, getting into exactly the reality-distorted mindset of the protagonist. It was extremely effective and very, very creepy.

Underwear Destroying Moment: Fighting a horde of enemies, then getting a message onscreen saying the controller has been unplugged while they mercilessly destroy you. To quote Ahnold in Total Recall, "It's the best mindf*** yet!"

One thing, real insanity is much less interesting "in this way" than these imagined insanities. One example is the difference between the movie "A Beautiful Mind" and the real story of John Nash. They're both interesting, but in different ways.

Also, insanity doesn't necessarily mean the rules aren't self-consistent, it just means the rules aren't consistent with reality. In a dream, it all makes sense; it's only when you wake up that you realize it doesn't.

I love the "dark innocent" sort of insanity. Tim Burton, American McGee's Alice, Halloween world in King's Quest VII, the Addams Family. Blacks are white, whites are black. Jack Skellington says, "There's children throwing snowballs instead of throwing heads. They're busy building toys and absolutely no one's dead!" The Cheshire Cat comments, "How fine you look when dressed in rage. Your enemies are fortunate your condition is not permanent. You're lucky, too. Red eyes suit so few." Not evil, just dark.

I also like the idea of insanity reinterpretting what's happening. One of my favorite books from when I was younger in "I Am the Cheese".
*spoilers*I love the ending where we revisit all the people and locations we saw during the bike ride, but find that really we just rode around the hospital.*end spoilers*

I'm also intrigued by the idea of letting the player "play with" the insanity. Perhaps at first things just happen. Shadows chase you, going in the door you just came out doesn't bring you where you just were, you hear/see things that aren't there. As you descend into/ascend from madness (either would justify the game mechanic), perhaps you can start to control these. Your shadow can fight beside you, you can summon doors to other locations, the voices whisper useful advice (something like a spidey sense?). Could be especially interesting if you have to fight two battles: one in the real world and one in your head. If you take the descent approach, then madness gives you more powers to fight the battle in your head but makes you less able to interact with the real world. The ascent approach could make you more powerful in both realms. (Which you choose should probably be decided by which fits the story, both can lead to interesting gameplay.) I suppose you could even do a Matrix and have the powers start to work in the real world. 12 Monkeys could also give some ideas with the fighting two battles idea.

Maybe you can't win both battles. You can have one of three "successful" endings: Win in your head, win in real life, create a stalemate between the two.

Sorry if this is a bit unorganized. I gotta run.

It might be good to have the game involve a real, sane world all around you with which you interact in order to avoid the game simply being a weird fantasy setting. Some ideas:

1) Start the game without the player knowing that he/she is crazy. Gradually little clues will start to show the player that something is wrong. When you recognize your insanity (which should not be an event scripted to occur at a certain point) you can try to cure it, or you can just descend into utter madness if you prefer.

2) Have the player live in what is mostly an ordinary city and interact with it much of the time. But he starts seeing people that others don't and hearing voices and such.

3) Have only temporary insanity. Sometimes everything you are seeing and interacting with is real. But sometimes the insanity kicks in. If many effects of insanity are subtle, the player will begin questioning what is and isn't real.

Quote:

Original post by Binomine To be really insane is to simply not be able to function in society.

But, that's a definition from an external perspective. In a game where the player character is insane a definition from an internal perspective (I am sane, it's the world which is mad) is more relevant.

As been said, there are different kinds of 'madness'. Insanity or the psychotic kind is not really doable for a game (nor in real life, i tell you[grin]).

I loved how vampire the bloodlines did it. In that game you could play a kind of vampire. malkavian, who are mad by nature. They could use their 'dementation ability' to screw with people. Sometimes you hear weird voices coming out of your speakers, totally unrelated (or not?) to the gameplay. The dialogue of the pc were just so random and whacky, really confusing but very funny.

Madness, or the more imaginary kind, could be 'simulated' in two ways. You can set up a world with consistent rules of a very bizarre, surreal kind.
Alternatively, any character (doesn't have to be the pc) could have some rules of its own that are more or less consistent, but deviate from the normal rules of the game, and thus perceived obviously as mad by anyone but that character, or even out of sync with the reality of the gameworld. (this would come a little closer to the actual psychotic experience). The hard part is making the 'mad' symbolic world of the PC at least a little understandable and believable, while still making sure it is obvious a deviation from normality and / or reality.