Most people are unclear about the difference between psychological fiction and paranormal fiction. They try to classify most of these types of works under the better known term of paranormal fiction. However, there is a difference that should not be overlooked.
Psychological fiction (also referred to as psychological realism) emphasizes the inner thoughts, motives, life of an individual. These inner workings are crucial or at least very important in explaining the character’s actions. Often times, there is more emphasis on the character than the plot, although the plot is not neglected in the story.
In a paranormal fiction (also known as supernatural fiction), elements of the world that lie outside the understanding of scientific reality or philosophical materialism (physicalism) are included in the story. For example, the stories may include ghosts, vampires, shape-shifters and beings with magical powers. This type of fiction incorporates a part of reality that cannot be proved by traditional scientific means.
It is tempting to classify many examples of psychological fiction under paranormal fiction because the work can be interpreted along the lines of the paranormal. A good example is Henry James’ The Turn of the Screw (1898). The story focuses on the inner motivation of the protagonist, which becomes key to understanding the ending. The motivation can be interpreted as the result of a disturbed woman or as the result of supernatural activity she becomes aware of. Still, the story is not decidedly paranormal since both interpretations are possible. Hence, it should be classified under the broader category of psychological fiction.
The general rule is that, if the reader has a choice to interpret the motivation of the character as paranormal or non-paranormal, then, the story is a psychological fiction. If the work is decidedly paranormal in its interpretation then it is classified as a paranormal fiction.