Consider a game mechanic in which the player character can encounter events making them doubt their sanity, or perhaps having them believe in the supernatural right off the bat, even if the eldritch horrors witnessed might end up mere hallucinations and figments of the mind. The character needs to be able to remain sane, despite events working to throw them off reason.
A dragon emerges from under your bed. You could run or maybe fight it, or you could remember that you took some slightly out of date headache medicine last evening and try to ignore the apparition.
You are thrown into a parallel magical world. You could explore it as if it were real, or you could start noticing real-world parallels which could lead you into realizing it's just a dream and you need to wake up, or use it to your advantage and interact with your subconscious.
A dream proves prophetic. You could believe you have clairvoyant powers, or you could focus and remember the details and realize that the dream was actually quite vague, not really prophetic, and you're experiencing cognitive bias or dream-déjà-vu (déjà rêvé, it's a thing!).
If the player fails to draw parallels or rationalize (given limited time or chances to point things out and thus negate the possible sanity loss), their character will eventually succumb to the insanity and stop behaving rationally, to whatever extent the scenario allows (landing in an asylum? never waking up from the coma?). If they succeed, they could start playing the events to their advantage - recognizing who's drugging them, remembering details of events as if under hypnosis, etc.
What would be the drawbacks/highlights/pros/cons of such a setup?
Note that this wouldn't end up like Sanity in Call of Cthulhu, in which monsters and magic do exist and characters simply go insane when interacting with them; neither would traumatic events affect sanity in my mechanics.