Psychotic villains are characters who suffer extreme mental illness, personality disorders or a mix of both - which causes them to dissociate from reality in multiple ways, often they are considered "criminally insane" but it is worth noting very few of them would actually be considered "insane" by legal terms, this does not change the fact they are far more disturbed than your average mentally ill villains. However, they still have a clear moral agency as their psychosis doesn’t detract from their heinous crimes and therefore can still be regarded as legally sane.

They are also, despite what media often states, NOT true psychopaths - they may display sociopathic tendencies but they differ in the fact that they lose touch with reality and engage in wild, bizarre and horrible behaviors that are often highly self-destructive and unpredictable.

What sets a psychopath from a psychotic sociopath is that while psychopaths enjoy structure when it suits them and do not needlessly endanger themselves and are very careful to not expose their crimes to the mass public, sociopaths often don't care so much about structure or what others view them as but at least they are still partly sane, coherent and can plan ahead without leaving traces but are still prone to anxiety and anger if things don’t go their way. They do not actually lose touch with reality but suffer from an emotional dysregulation and a lack of emotional intelligence which hinders their ability to control their impulses and emotions, knowing full well of the consequence, thus making them worse because they know what they’re doing despite being emotionally unstable but they don’t care at all to stop themselves from harming anyone including themselves in the process if it means achieving whatever goal they have in mind. Psychopaths can however be neurotic, unstable and dangerous like a sociopath.