Immersive virtual reality is a technology that allows the user to immerse in the virtual world in isolation from external stimuli. It enables the simulation of different social situations, often impossible to arrange in reality, with high control over the confounding variables. Thanks to the VR realism, the viewer of this reality behaves similarly and experiences similar emotions to those in natural conditions, which results in high ecological validity of this environment, making it useful for diagnostics and therapy. This review, conducted in a narrative way, presents the results of observational and interventional research using immersive virtual reality (VR) in exploration of mechanisms generating psychotic symptoms (mainly in the scope of paranoia), as well as cognition and social functioning (research with the use of virtual avatars) in persons diagnosed with nonaffective psychosis. The research included in the review has been divided by the authors into two categories, depending on their type and the related level of reliability of the results. Moreover, the authors discuss technological aspects of VR, including the most important ways of presenting it, the differences between VR technology and classical neurocognitive tests, and the use of this technology for diagnostic purposes. As far as the treatment of psychotic disorders is concerned, the authors discuss VR interventions focused mainly on delusions and auditory hallucinations. Finally, the prospects for further development and use of VR technology in psychiatry are discussed.