This paper summarizes Freud’s contributions to the psychology of psychosis and shows how Freud’s conceptions provide a prelude to modern Bayesian predictive processing models of how the brain works, which in turn offer explanations a variety of psychotic phenomena, including ideas of reference, hallucinations, and delusions. The paper offers a psychological model of psychosis from a developmental point of view that draws upon psychoanalytic object-relations theory, and concludes with a detailed case history of the successful psychotherapeutic treatment of a man with a paranoid delusion of 8 years duration that was unresponsive to neuroleptic medication, but who achieved a robust recovery with 18 months of once-a-week psychotherapy. The case example is discussed from a Bayesian predictive processing and psychoanalytic point of view.