It also underplays what I've personally witnessed that I would consider true AI psychosis.

I worked with someone who sincerely believed he was spiritually co-evolving with his army of sycophantic AI agents (the agents would be tasked with discussing his thoughts at night and collaborated to give him morning reports about his progress). He would publicly write about how relationships with friends and family collapsing was a natural consequence of being so "advanced". I also never once saw any meaningful work done by his team of "agents", they existed solely tell him how smart he was (of course he specifically set up the system to 'challenge' him but... in practice that didn't seem to be working).

I suspect there are a lot more people quietly going through something similar but keeping it to themselves better.

I would distinguish this type of behavior from people who over ambitious views of what can be accomplished with AI.

Having had experience dealing with people with conventional psychosis, I don't see it as a binary thing. Aside from a full-on psychotic break and full remission, there is a broad gray area. It can be a miasma of reality and non-reality that the sufferer may mask to varying degrees, but which influences their behavior and logic.

So, to me, AI psychosis seems apt to describe the murky areas where people are misapplying AI agents and thinking of them as social entities or suitable to drop into previously human roles, rather than carefully defining appropriate risk management strategies for this new technology.