Thanks, allowing it in your game is one of the biggest compliments you can give.
I can see what you are saying about the complications for damaging distraction. Part of my goal with this ability is that it would be extremely swingy (representing the madness of the subclass and the PC in general). Having that 1d4 difference be what causes the damage to the attacker gives that amount of swing that I was seeking. I will think it through and see if I can simplify it some, but no promises.
There aren't a lot of psychic damage spells out there, which is why I gave access via domain spells (which were screwed up before and fixed now). However, that is also why I added in psychic damage to sacred flame and made channel divinity work on psychic damage from abilities (level 6 ability). You do have access to these spells that do psychic damage.
Dissonant Whispers
Phantasmal Force
Phantasmal Killer
Synaptic Syntax
That's interesting about the level 8 feature. I went with casting because it allows your to do more psychic damage as a class, but you have a solid point about being a melee as a subclass. I guess I just expect that melee damage subclass features would get either martial weapons, heavy armor, or both at level 1 (which didn't seem fitting to me). Do you think that this class should get access to martial weapons at level 1 as well then?