system
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human
[High Fantasy] What are people's mental health like in a world of magic and monsters?

On the minus side there are things out there that can easily kill you without warning, things that love to hurt you and even need to murder you to survive - your pain and fear is their meat and drink.

On the plus side you get repeated examples of people getting the most outrageous desires fulfilled through luck or skill or simply just believing hard enough that it will happen. In some cases just being crazy enough to hallucinate that it's already happened is enough to make it happen, or at least enough to enjoy it.

 So the minus is mind-breakingly depressing, while the plus is mind-warpingly encouraging. Is there a sane and healthy balance that most people manage, or is the average peasant completely off their rocker? 

{On a completely unrelated note, currently listening to Warren Zevon's "Roland the Headless Thompson Gunner". I mean, of course when Roland aimed his Thompson gun he didn't say a word, after all he didn't have a head.}
gpt
It largely depends on the fictional setting in question. 

In H.P. Lovecraft's Cthulhu Mythos (which isn't technically High Fantasy, but worth considering here), characters who become aware of the supernatural tend to go insane or become unhinged. The awareness of entities with such immense power is a world changing revelation that leads to nihilism and madness, as people realize that humanity doesn't matter and could be wiped away in an instant. 

In contrast, in The Lord of the Rings, the defining example of High Fantasy, it's entirely possible to have normal mental health. Hobbits hold birthday parties, grow crops, and smoke a pipe by the fire after a hard day's work. The Elves are aware of the powers at work in the world, but are wise enough and experienced enough to know how to deal with it. Even the men of Gondor and Rohan largely experience supernatural danger in the form of Orcs, and those can be killed with a bow or a spear. When they do face truly magical opponents like the Ringwraiths, they take comfort in knowing that they are protected by Gandalf, a supernatural force of their own. 

In The Stormlight Archive series, colossal magical windstorms regularly shred the land. These storms would be horrifying in a more mundane setting, but because people have had generations to get used to them, they're just a part of life. Buildings are constructed to be storm resistant, people learn how to tell when a storm is coming, and the plants and animals have all evolved to be durable and hardy in such adverse conditions. 

In The Malazan Book of the Fallen series, gods, mages, and supernatural beings are a dime a dozen, but the average footsoldier is largely unconcerned. They focus on fighting the enemy infantry, and leave the magic to their unit's mages. They're certainly wary of magic on the battlefield, but it's more like the fear a modern soldier would feel when fighting a tank than a supernatural dread. 

Really, it all comes down to acclimatization. If you've been around magic your entire life, then it's just something that happens, like an earthquake or a disease. In most cases, it would be no more difficult to maintain a healthy mental state living in the Malazan Empire or the world of Shannara than if you lived in a town that was prone to non-magical earthquakes. The fear of a griffon in the woods wouldn't be all that different to the fear of tigers or bears. Generally, you'd expect the average fantasy citizen to somebody in a roughly equivalent but non-magical situation.