Well, I hate to be mundane, but I imagine it's mostly (mostly, I say) a marketing label. I trust you weren't expecting a musicological definition. The phrase psych folk has its own Wikipedia page and I suspect it's similar to freak folk, which has been floating around for a while (and which also has a Wiki page). It's young people looking for a new niche, which isn't your niche or mine, and which incorporates all their influences in the mostly acoustic vein. As is usually the case, some's good, some ain't.

Michael Scully
Austin, TX