That's very much my train of though. I'm willing to wager that the only one suffering a mental effect is Elle, and that the thing putting her under that did that so that they would kill her for it. It knows Ardon got around it's trick the first time, so it would be logical if it has decent mental stats that it would be able to make the leap of logic that if someone did something once, they'd assume that doing it again would work a second time under what appears to be very similar or the same set of circumstances.

And that if Ardon hits for a fatal attack this time, but he's not REALLY in an Illusion, that Elle will really die, and that in all probability Odie will do his damndest to kill Ardon for that.

And if Ardon or Odie kill's the other, then all the entity has to do is mop up the survivor + Peanut.