Lost in a thick forest somewhere in the South of Germany, the storyteller happens on a long-bearded hermit, from whom he asks directions to the nearby village of B——. He is puzzled by the reply, though, for the hermit refers to the forest as a desert and recommends that he follow a friend to Alexandria, which is in Egypt, not Germany.

From a traveler on the road he later learns that the odd fellow is known to the villagers as Priest Serapion, a kindly gentleman who is “not quite right in his head.” Dr. S—— provides more background, explaining that the hermit, once one of the most brilliant men in the town of M——, was about to be sent on a diplomatic mission when he mysteriously disappeared. At nearly the same time a hermit calling himself Priest Serapion suddenly appeared in the vicinity. Then one day Count P—— of M—— recognized him as his lost nephew. Arrested after a violent struggle, he was committed to a lunatic asylum in B——.

The medical men there found only one thing wrong with his mind: the fixed idea that he was the same Serapion who fled the Theban desert in the days of the Emperor Decius (in the third century) and suffered martyrdom in Alexandria. Probably with the help of Dr. S——, he escaped from the asylum and was allowed to live in a hut he built in the forest.

Himself an amateur psychologist, the storyteller decides to go back to the forest and cure Serapion by attacking his fixed idea at its source. The story reaches its climax in their debate. Serapion insists that centuries ago he had survived a gruesome martyrdom, “his limbs being torn asunder at the joints, and his body thrown down from a lofty rock.” Even now there are reminders, he says, “a severe headache, and occasional violent cramps and twitchings in my limbs.”

At that point, the storyteller attempts his cure. First he explains the malady of the fixed idea, citing the case of Abbot Molanus, “who conversed most rationally upon every subject, but would not leave his room because he thought he was a barleycorn, and the hens would swallow him.” At last he stands up, takes Serapion by both hands, and cries loudly, “Count P—— awake from the pernicious dream.”

Serapion, however, is not moved. Instead he responds by reducing his adversary’s position to an absurdity with the observation that only a lunatic would try to reason another lunatic out of his lunacy, if it were lunacy, or if it were not. Because time and space themselves are relative and not fixed, their conquest is a feat his mind can perform.

Overwhelmed by “the very rationality of his irrationality,” the storyteller realizes the folly of his own undertaking and begins to understand how the madman can consider his madness “a priceless gift from heaven.” Serapion goes on to describe several supernatural visits from geniuses who died long ago, and he further demonstrates the power of his imagination by relating several spellbinding romances before their encounter comes to an end.

Converted from cynicism to fascination, the storyteller returns often to Serapion’s hut, though he never again tries to play the role of a psychological doctor. Then one day, after an absence of three years, he returns to the forest one last time, only to find the amazing man dead.