Imagination vs. delusion: Shutter Island

After reading Dr. Katherine Taylor's article and the few films she mentioned, I was provoked to think of more films that related to the topic of imagination vs. reality when it comes to psychological disorders.

First to come up was Scorcese's Shutter Island. "Psychology Today" journalist Jeremy Clyman discusses the movie and disillusion in his article, "Reel Today:  Unraveling the mind through film":
(Shutter Island: Separating Fact from Fiction). Throughout the entirety of the film we think Teddy is trying to figure out a crime and then is held in the institution against his will. It's not only until the last scene of the film we are told that he actually suffers from a psychotic disease and murdered his wife upon finding out she killed their three children. As Dr. Taylor states in her essay, "

“One might say...knowledge: it must derive from experience...[but] Imagination is a private thing, the leap of a single brain from established fact to exciting novelty.”  At the end of the film, we begin to question, Did Teddy hold this "knowledge" that he was a murderer all along derived from his experiences of living through his traumatic familial affairs? Or, did his imagination really take over (as a way to suppress those traumatic lived experiences, to "leap" from the fact that he was a killer to the more "exciting novelty" that his wife had died and he was actually the hero of his story trying to solve a crime?  

This film made me wonder, when one suffers such a traumatic experience as Teddy did, does imagination take over knowledge to suppress horrific memories and replace them with our own "private thing" in which happier thoughts prevail?