Psycho appears as a form of injected drug composed of strange, unknown chemicals of military origin, that comes with its own unique delivery system. It was designed at the orders of General Chase specifically for military use. It increases a soldier's damage resistance, and its dampening effect on higher brain functions make for tough, but uncontrollable, troops. This drug was very popular for human-wave assaults.
Psycho is unique among Fallout/2 chems in that its main effect - damage resistance - persists in weaker form as the drug wears off, whereas other drugs have severe "coming down" penalties.
Characters with an odd Agility will get an effective +2 Action Points off using Psycho, comparable to using a Jet but without the severe addiction risk/penalty.
Psycho cannot take your damage resistance past the 90% cap. Nonetheless, the difference between even 80% and 90% can be the difference between a lethal or harmless critical hit.
Like other chems that reduce a SPECIAL stat in Fallout/2, Psycho can be used to exploitively increase high-level skills for reduced skill points, simply by consuming up to two Psycho to lower Intelligence-based skills below a threshold where skill points are more effective, investing in the skills, such that when Psycho wears off, your skill reverts to a higher score than it should have been if you had invested your skill points normally.
Psycho is rare through most of Fallout 2, only turning up with increased prevalence in San Francisco. Even then, it is by far the most expensive chem in the game. All this is probably as a consequence of Psycho having an enormously powerful combat effect.