WMG / The Cave

The entire game takes place not in a nonsensical, Eldritch Location, but in a mental hospital.

• Each of the characters is, in reality, an ordinary human being; a patient who has created a heroic persona for themselves to cover up for their own fundamental flaws (see the Seven Deadly Sins section on the main page).
• The Cave is representative of the asylum itself, while its 'voice' is that of a psychiatrist, who slowly breaks down their heroic facades and exposes what intentions truly lie in their hearts.
• Whether the patients take on board their lesson depends on the player's final decision, but their successful escape from 'The Cave' (i.e. their release from the asylum) relies upon them letting go of the obsessions which led them to their current state.

The Cave is a malign entity, trying to tempt the player characters into making bad choices.

• The Cave never seems so happy as when it gets to narrate over the horrible, horrible things your characters do to progress. And if you get the good ending for all three characters, he actually sounds somewhat disappointed. This is not to say that the player characters were good people in the first place, but that the Cave is attempting to exploit their profound personality flaws for its own reasons.
  • This may be jossed: He(?) seems quite pleased when the characters get their good ending, and when they fail, he(?) muses that at least you might've learned something from all of this.
    • Original poster here. Seems to be a case of Your Mileage May Vary, since I interpreted The Cave's closing monologue when all three characters earned the good ending as having a sorely disappointed subtext, as if he was thinking something like "Rats. I was sure I could make at least ONE of them take the bait." And that the "Well, everyone seems to have learned their lesson" text is all part of the cover.

The Twins are Dead All Along.

• In their Cave Paintings the Twins are presented as normal-looking human children (ignoring, of course, the creepy Psychotic Smirk they're always sporting). But in the game itself, they're deathly pale with weird glowing eyes. This could be because, for them at least, the bad ending already happened to them. The Cave is their last chance to change the past and prevent their own deaths. This does, admittedly, open up the possibility that ALL the player characters are being given the chance to rectify a mistake already made, though the Knight doesn't LOOK like he went through his bad ending. Although if he ever took that helmet off....
  • This actually makes sense, and even explains a small issue that one character has. The Monk was terrible at the virtues that the others needed, so the only way he'd have the powers he had is if he gained power through an alternate route (i.e. becoming an evil monk). Even the fact that the hillbilly doesn't look like an enraged monster can be explained by him having a psychological trigger involving circuses, and the time traveller could be explained by simply not changing with the future she ruined.

The entire adventure is a Journey to the Center of the Mind happening at the split-second immediately before each character is about to make a particularly momentous decision.

• In essence, the Cave is the "collective unconscious" described by Jung—a place that every human mind can access deep within their own thoughts (as an extra bonus, the Collective Unconscious is an actual location in Psychonauts, which Double Fine also made). The Cave Paintings represent the steps leading up to this decision, and the site-specific puzzles for each character are them imagining what might happen if they go through with it—in other words, the opportunity to consider the consequences of the choice. That's why you return to the gift shop in the end: the characters are now ready to decide whether or not they truly want to take that final step, or walk away.