There are a number of ways that characters can react to apparent encounters with the supernatural or otherwise out-there. Often, they won't be willing to accept it right away, and their minds will wander to, usually, three different explanations:
This trope is about the third one of those explanations.
Distinct from a Cuckoo Nest
plot in that those usually involve the character being told that their entire life (or at least a large part of it) was fake, whereas in this trope, they believe that they've only lost it recently. If the person actually is insane, but the audience still sees what they're seeing, it's Through the Eyes of Madness
. If you never find out whether they're sane or not, that's Maybe Magic, Maybe Mundane
- This seems to be the premise of the upcoming film Take Shelter: the protagonist is receiving apparently prophetic visions, but knows that his family has a history of mental illness, leaving him unsure as to whether or not to act on what he sees.
- In Wonderfalls, Jaye warns Eric at their first meeting that "I might be clinically insane". Though she doesn't explain as much, this worry is brought on by the fact that inanimate objects have been talking to her. She quickly comes to the conclusion that she's not insane, though.