On Halloween night in 1985, Shawn and Gus witness a troubled girl throw herself from her window at the Wispy Sunny Pines mental institution. From that moment on, "Scary Sherry" has haunted the halls of the now abandoned facility where we find a girl, Doreen Harthan, being chased by what appears to be her ghost through the halls of Wispy Sunny Pines, falling through the same window to her death below.
In the Psych office, Juliet comes to Shawn and Gus for help. She is undercover as Mary Lou Baumgartner, national alumni vice parliamentarian of the Beta Kappa Theta sorority, of which Doreen was a pledge. The going theory is that Doreen killed herself in a copycat of Sherry's original suicide but Juliet thinks there is more to the story. She's sure Doreen's sorority sisters know more than they are letting on. She needs a psychic to read the sorority house because the girls think they are being haunted by Doreen's ghost.
Meanwhile, Lassiter has been temporarily reassigned to train a rookie detective from another department. It turns out this rookie, Goochberg, is the oldest rookie in department history. She took the test 14 times before she passed and, despite Lassiter's tutelage and her complete lack of experience, has her own set way of doing things.
At the sorority house, Shawn and Gus are having their best day ever "reading" Betty, Bianca and the rest of the sorority sisters in the middle of their pajama party. As the girls start to describe the creepy unexplainable things that happen there at night, the lights flicker on and off and Doreen's ghost appears screaming "acnaib" outside the window - which sends Shawn and Gus running for their lives.
Gus, the quicker of the two, takes off, leaving Shawn to investigate. He finds evidence that the phenomenon was man-made with speakers and wires. Juliet says anyone could have done it but Alice Bundy, Doreen's best friend from childhood, definitely has a score to settle.
Back at the Psych office, Gus has been doing some investigating of his own. By all accounts, Doreen had too much to live for. She wouldn't have committed suicide. Plus, from a picture of the crime scene, it appears the latch on the window Doreen went through was broken - suggesting she fell backward out the window by accident. Shawn then realizes that the word "acnaib" the supposed ghost was yelling is "Bianca" backward. Bianca is in danger. He calls Juliet and they all rush over to the sorority house but it is too late. Bianca has been murdered.
At the police station, Vick grills Betty who admits Doreen's accident was a haze. Doreen was supposed to spend all night at the haunted asylum and they pretended they were Scary Sherry to scare her. As Doreen accidentally fell through window, Bianca tried to grab her arm to catch her but was too late.
At the Psych office, Gus tells Shawn that Alice Bundy, now the top suspect for the murder of Bianca, has an airtight alibi. She lives with Doreen's family and was upstairs in her room all night. Shawn doesn't believe there is such a thing as an airtight alibi. He knows Alice did it. He just has to figure out how.
Shawn and Gus go to the Harthans to investigate. Gus distracts the housekeeper, who tells him that Doreen's parents are at the cemetery, while Shawn sneaks in the back. While there, Shawn gets a call from another sorority sister who tells him that Juliet went to a candlelight vigil at the asylum hosted by Doreen's parents. He also discovers exactly how Alice was able to get out of the house the night Bianca was killed without being seen. When Gus rejoins him, he tells Shawn that Doreen's parents aren't at a candlelight vigil. Shawn realizes Juliet is being set up. They race over to the asylum, calling Lassiter for back up on the way.
At Wispy Sunny Pines, Alice attacks Juliet with an ax, but Shawn, Gus and Lassiter arrive just as Juliet gets the upper hand. Alice is taken away in handcuffs, Juliet is Juliet again and, as Goochberg's pacemaker has put her in the hospital, Lassiter's temporary reassignment is thankfully over.