Sanity is the central system of Stygian: Outer Gods and the thing that makes it more than a survival horror shooter. It is not a bar you are trying to keep full. Every point of sanity you lose costs you something concrete, and every point you lose buys you something else. The game is constantly asking you to decide which.
Combat effectiveness degrades as your grip on reality slips. Aim steadiness suffers, reloads slow, and damage output drops. Perception changes too, and this is where the game plays a careful trick - the screen distorts, audio warps, and visual information becomes less trustworthy, but what you are seeing is not the game lying to you. It is showing you something you are actually perceiving.
The practical result is that a low-sanity player is measurably worse at shooting and much worse at navigating. That penalty is real and it is meant to be felt.
This is the other half of the bargain. Characters who are not fully lucid will talk to you. Fragments of dialogue that were inaccessible become available, and some of them are the only way to reach a specific puzzle solution. Certain documents and lore entries only surface when you are far enough gone. The game does not label these routes, so discovering them is a matter of paying attention to what the broken-up version of a conversation says that the lucid one does not.
There is a meaningful decision underneath this. Push your sanity low enough in a difficult encounter and you will get through it faster, at the cost of your performance in the next one. Players who understand the trade tend to deliberately drop their sanity in safe rooms to buy information, then recover it before moving on.
Sanity recovers at rest points, but slowly and not completely. The game offers several routes to recovery, and they are deliberately uneven: some are reliable but expensive in scarce resources, some are cheap but take time you may not have, and some are risky in ways that interact with the story. Because resources are scarce across the board, the recovery method you can afford depends on how you spent your resources getting there.
Your final sanity state carries weight in the ending. A protagonist who arrives at the end of Kingsport still holding onto themselves is a different character from one who has given way, and the 1.0 release added a final chapter that reads this state. There is no single correct balance - the game is built so that a heavily degraded run is a different and valid playthrough.