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In the title story, "Lost in the Funhouse," the funhouse serves as an analogy to the way the story is constructed. We have a narrator writing a story about a young boy named Ambrose. We don't know if the narrator is Ambrose himself. If this is so, Ambrose is writing a story about Ambrose writing a story about Ambrose. Note the doubling of narration: similar to the mirrors of the funhouse.
The narrator diverts from the story to comment on types of narration and story techniques, thus facing the mirror on the act of writing the story. So, we have mirrors reflecting the narration but also on the act of writing. Similar to a funhouse full of mirrors, some of these are diversions from the real story. A reflection in a funhouse is like a diversion; it fools you into going the "wrong" way. But that's the fun of the funhouse: to take tangents and to follow those illusions (reflections).
Schizophrenia is a mental disorder characterized by split mental functions (not a split personality). The schizophrenic might have delusions or be paranoid: these symptoms are similar to the feelings one might have in a funhouse. And since the story is constructed like a funhouse (mirrors of narration and self-reflexive writing), the reader might also experience disillusionment or plain old annoyance at a story that wanders and reflects back on itself.
Ambrose himself does not find the funhouse fun. He comes to the conclusion that he's so introverted that he can not enjoy the funhouse, but he can make them. So, at the story's end, Ambrose is more of a writer than a lover (although he wants to be the latter). He thinks he can build a funhouse or write a funhouse-like story; but he lacks the courage to actually be in one. In this respect, Ambrose shows his introversion which might be a mild schizophrenia, but it is more likely about an adolescent negotiating the conflicting feelings of growing up. It can be a confusing time, like going through a funhouse full of diversions and delusions.
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