Most modern fantasy games seek to emulate a magical version of the Middle Ages, a time when mental illness was considered a form of demonic possession. And to be fair about it, exorcisms are far more interesting than psychotherapy and medication, so most fantasy tropes take this concept and run with it. Taken to its obvious and logical conclusion, you end up with the Cthulhu Mythos, n-dimensional entities who are so fundamentally alien their mere existence causes madness and are to blame for all sorts of deviant behavior.
But there are no demons in Pellatarrum to possess people. In fact, there are no Outer Planes at all, having been destroyed in a cosmic götterdämmerung millions of years ago. So then, you may well ask, how does mental illness originate in Pellatarrum in a way that is both internally consistent and provides story hooks?
The answer is simple, but much like with physics, you must first throw out everything you think you know about mental health, because psychology is another kind of science and you know Pellatarrum's stance on science.* Instead of a detailed breakdown on what is a mood disorder versus what is an organic brain disorder, madness is based upon over-exposure to the various energy and elemental planes which surround and affect the Material Plane, and can be broken down into 6 major categories of Elemental Disorder:
Aggression is caused by too much exposure to Elemental Fire. At low levels this is merely being "hot-headed" or having a "hot-temper", but increasing amounts of Fire Disorder result in what is known as "The Burning": violent paranoia, homicidal urges, and berserker rages. This is considered normal behavior among Orcs, which is to be expected, since they all originated from the Plane of Elemental Fire. (In fact, each form of Elemental Disorder is considered a typical behavior for its native race.)
Typical treatment for the Burned is to expose the subject to large quantities of earth, the element of winter and stability, in order to "cool him off". Folk remedies often involve burying the Burned up to his neck in the dirt for 24 hours. If the malady persists and Elemental Earth cannot be summoned, the individual is either locked in a cool, dark cell until he recovered, or is exiled to a cold region. Water is usually avoided in all but the most extreme cases, as the intent is to restore the Burned to normalcy, not quench their passion entirely and replace it with fear (see Anxiety, below). In extreme circumstances, of course, often the only recourse is a swift public execution.
Anxiety is the Water Disorder, and it runs the full spectrum from mild neurosis to full-blown phobias, fugues, and other dissociative states. Much like water will seek any crack or weakness in an attempt to escape, so too does the mind of the afflicted. It does not like to be held or constrained, and instead attempts to flee at the first opportunity. Violent only if prevented from fleeing what they fear, those afflicted with "The Drowning" are dangerous only to themselves and to those foolish enough to attempt to save them. Wood Elves a famous for their phobias: the most common seem to be agoraphobia, claustrophobia, nosophobia (fear of disease), and xenophobia. The other races do not often interact with Sea Elves, but to a one they all seem to suffer from terraphobia, the fear of dry land.
Treatment is difficult as the Drowned are experts at fleeing and avoiding that which they fear, but when they can be caught and prevented from injuring themselves, they are exposed to fire in an attempt to evaporate the excess water within them (sweating and fearful urination are seen as signs of progress toward recovery) and hopefully re-ignite their courage. Sadly, what often begins as simple proximity to a fire pit or imprisonment within a sweat lodge often results in injuries and deaths from dehydration, burns, and violence from family members insistent upon "burning the fear out of them."
As a point of interest, scholars are baffled by those who suffer from fear of the water, as it seems contrary to reason that having too much of an element within one's self would result in fear of that same element. The closest they can come to explaining it is to point to the extreme cultural divide between the Sea Elves and the Wood Elves and assume the explanation lies therein as a form of "self-loathing".
*Its unofficial motto is "Fuck science. Fuck it up the ass."