I gather you’re saying terms like “psycho” and “nutter” are slurs against people with mental illness and so should be avoided, because they reinforce negative stereotypes about mental illness. That’s actually a new concept to me but it does make sense, much like avoiding terms that are slurs against gay people, women, ethnicities, etc. I guess the casual use of terms like “crazy” as a generic insult is the most common issue.
The tricky part is finding alternate terms when a term in actually needed. Take Adam’s example of the movie “Psycho”. Is describing the villain Norman Bates as “crazy” offensive? He’s depicted as having multiple personalities, there’s even a scene at the end where a psychiatrist declares him insane (they actually say he’s schizophrenic, which had led to a popular misconception that “schizophrenia” means multiple personalities… it doesn’t). Presumably it’s not offensive to describe him as not just violent, but also also mentally ill?
I think I take your point about the Wild Hunt though. It’s hard to know whether the villains there are intended to be portrayed as “mad” or just “bad”, and they’re not the same thing.