You're attacking a straw man of your own invention here. In casual use (like above), "psycho" means somebody acting in a bizarre or dangerous manner, eg. trying to buy all the toilet paper in the store and not taking "no" for an answer. Nothing to do with actual mental illness.

Obviously the etymology of the term comes from psychological illness via a certain famous Hitchhock movie, and that's one reason why the term du jour these days is "Karen" instead.