Confirmed working :)
create file DisplaySettings.ini in steam Psychonauts folder
you can also mess with the width & height setting
I settled on 1260x720 with hidden task bar

[DisplaySettings]
ScreenWidth=1280
ScreenHeight=720
FullScreen=false
VSync=true
FSAA=true
FSFX=true
AdvancedShading=true
Shadows=true
GammaCorrection=1.000000