Psychological literature deals with the inner person rather than the exterior actions of people and events.
The psychological novel is traditionally understood as a genre of prose fiction that focuses intensively on the interior life of characters, representing their subjective thoughts, feelings, memories, and desires. (The Encyclopedia of the Novel)
In truth, there is actually no novel that is not at least in part psychological since omniscient narrators examine the inner workings of many of their characters. But the intensity with which these inner thoughts and feelings are examined by means of such devices as stream-of-consciousness distinguishes the psychological novel from the others. In other words, there is a removal from the exterior world around the character.
One of the earliest psychological novels is Fyodor Dostoevsky's Crime and Punishment, published in 1866. The narrative of this novel revolves around the inner workings of the main character's mind. A brilliant but conflicted and impoverished student named Rodlon Romanovitch Raskolnikov devises a theory about extraordinary men being above the law because in their brilliance they think "new thoughts" that are contributions to society. He then sets out to prove his theory by murdering an old pawnbroker and her sister. As the narrative progresses, Raskolnikov becomes tortured by his conscience and imaginings.
In the twentieth century, psychological novels became more prevalent with the writings of the Modernists, such as James Joyce and Virginia Woolf, who explored "the private, psychological, fantastic and the neurotic," and the studies of Sigmund Freud and others. By way of interior monologues, stream-of-consciousness, and free indirect discourse, the illogical language of the unconscious mind was expressed in narratives in an imagined removal from ordinary life.