Im just posting this for others to see. If anyone has issues with mouse sensitivity being incredible low even on the highest ingame setting, try going to graphics and disable Vsync. That at least did the trick for me.

Edit: The above only seems to work on the menus. But you can still change the sensitivity from the INI file located in the folder Psychonauts --> Profiles --> Profile 1.
Also disable Altitude Dampening and Smart Camera.

Its not perfect IMO but it should make it better.