When conversing with citizens in Solitude, it is learned that a strange man is loitering on the path to the Blue Palace.

Investigate the man wandering the streets near the Bards College
Upon proceeding to that location, a man named Dervenin is encountered, dressed as a beggar. During the conversation, it is revealed that his master, Sheogorath, abandoned his realm and his people years ago, and Dervenin is unable to convince him to return. Since Sheogorath currently refuses to see him, Dervenin requests assistance. He states that his master went into the forbidden wing of the Blue Palace to drink tea with a friend. One receives a hip bone from Dervenin, without which access to that location cannot be gained.

Gain access to the Pelagius Wing of the Blue Palace ★
The steward Falk Firebeard can be addressed. If the side quest "The Man Who Cried Wolf" has been completed, Falk will hand over the key after a brief conversation. Alternatively, the key can be obtained from the castle servants Una or Erdi by lying to them, claiming that one must go there on behalf of the steward.

Use the key to gain access to the Pelagius Wing / Search for Dervenin's master in the Pelagius Wing
With the key, one enters abandoned rooms filled with dirt, dust, and cobwebs. On the upper floor, a corridor is reached from which one is transferred to a different plane of existence. Just before this occurs, one is stripped of their equipment. One materializes in fine clothes within the subconscious world of Emperor Pelagius III and, first of all, hears Sheogorath say:

On a clearing stands a richly laid table, and Sheogorath and Pelagius the Mad converse regarding the endless duties and tasks of an emperor. One can interrupt the conversation or wait until Pelagius has departed.
The subsequent insane conversation with Sheogorath lasts for a while until he finally comes to the point and realizes that he is finished here. He notes that his vacation is over and everyday life calls. However, first, he wishes to enjoy himself once more and observe how one escapes from this location. He merely explains that one is inside the head of a dead, dangerously insane monarch and hands the player the Wabbajack as the sole tool.

Use the Wabbajack to escape from Pelagius's Mind
Three paths lead from the central clearing featuring the set table. All three terminate at different aspects of Pelagius' madness, which must be resolved in three individual tasks. The order in which one proceeds is irrelevant.

• Path to the Northwest – Paranoia.
  Along the path, Sheogorath's voice is perceived within one's mind, explaining that Pelagius' fear and suspicion originated from his mother. The path terminates at an arena structure. Upon the stands sits Pelagius, flanked by two bodyguards clad in Dwemer armor. A battle between alternating atronachs is observed. The instruction given is: "Use your Wabbajack to defeat the enemy, while they do the same!"
  
  Explanation and solution

  One has to deal here with Pelagius the Suspicious, who is fighting a battle against himself. The objective is to relieve him of his paranoia. The fighting atronachs are his servants and are intended to distract him from the actual threat (but also to mislead the player). The real enemies sit alongside Pelagius, and their true nature must be uncovered. Striking one of them with the Wabbajack causes both to transform into wolves, finally attacking unmasked. Consequently, the cause for Pelagius' fear and paranoia is eliminated, allowing him to imagine himself in safety.
  Upon returning to Sheogorath, one can report that Pelagius' paranoia has disappeared.
  
  
• Path to the Northeast – Night Terrors.
  Along the path to the northeast, Sheogorath's voice explains that this constitutes the path of dreams and that Pelagius suffers from night terrors. One is instructed to locate something capable of awakening Pelagius.
  
  Explanation and solution

  MA clearing is reached upon which Pelagius the Tormented sleeps in a bed. He is plagued by nightmares, and one must relieve him of them by eliminating the causes. Striking Pelagius with the Wabbajack causes the first horror to materialize - a wolf that attacks either Pelagius or the player. Striking the wolf causes it to transform into a peaceful goat. This process is repeated until all terrors are eradicated and Pelagius is able to awaken. If one misses repeatedly or waits too long, the procedure must be restarted from the beginning.
  The subsequent terrors include:

  • Bandit Leader transforms into Young Pelagius
  • Hagraven transforms into Sultry Maiden
  • Flame Atronach transforms into Campfire
  • Dragon Priest transforms into Treasure Chest
  After freeing from the nightmares, the success can be reported to Sheogorath.
  
  
• Path to the Southeast – Self-Confidence.
  Along the path, Sheogorath's voice informs that Pelagius hated and feared many things, but the deepest and most bitter hatred was directed toward himself. Upon the clearing, a tiny Pelagius named Confidence is observed. He is beaten by the oversized manifestation of his Anger. These represent his self-directed attacks. Self-hatred only renders Pelagius angrier, and his self-confidence weakens with every strike. One is instructed to bring both into balance.
  
  Explanation and solution

  Pelagius' anger must be diminished by striking the large entity with the Wabbajack. Once Anger and Confidence are equally small, Self-Doubt materializes in the form of ghostly Pelagius warriors wielding conjured axes, attacking his self-confidence. One must now strengthen Confidence by striking the small Pelagius. As soon as he grows large enough, the confrontation concludes.
  Through this, Pelagius regained enough self-confidence to accept himself. This task is hereby resolved as well.
  
  

One then returns to Sheogorath, who is already in a state of departure. He laments the mess that Haskill (his chamberlain) caused during his absence and summons Dervenin to the table. The latter is overjoyed to see his master again and looks forward to the journey home to the Shivering Isles. Sheogorath dispatches him ahead, presents the player with the Wabbajack, and invites them to New Sheoth for some strawberry tart.
The quest concludes, and one is transferred back to the Pelagius Wing within the Blue Palace.

Known Bugs

• Dragon sightings within the plane of Pelagius' psyche have been reported (Patch 1.2). Since one possesses no means to combat them, reloading a previous save is mandatory.

Tips & Notes

• Sheogorath is considered one of the 16 Daedric deities within the faith of Daedra worshippers (such as the Dunmer). However, his true identity was revealed during the main quest of the Shivering Isles. The Mad God Sheogorath was merely a perverted form of the Daedric Prince of Order: Jyggalag. Since the Hero of Kvatch ended the curse upon Jyggalag, a Daedric Prince of Madness can technically no longer exist. Some players therefore hypothesize that the Skyrim Sheogorath represents the Hero of Kvatch, who assumed the throne of the Shivering Isles at that time. However, more evidence and details argue against this hypothesis than for it. Furthermore, it would constitute a taboo breach that Bethesda has avoided throughout the entire TES series thus far - namely, visually depicting the hero that the player previously embodied in a subsequent game. The underlying reason is that Bethesda cannot simply dictate the gender of the hero. Many players utilized a female character in TES IV, who ultimately became the Madness Sovereign of the Shivering Isles. Consequently, the entity in TES V can neither be the original Daedric Sheogorath nor the Hero of Kvatch, as Sheogorath was replaced by a woman in the playthroughs of certain players. The male depiction of Sheogorath in TES V remains a blatant lore breach.
• Dervenin is known to Shivering Isles players as the Priest of Mania, who preaches aspects of manic pleasures within the Sacellum Arden-Sul. At that time, he was dressed splendidly and colorfully. The 200 years since then have aged the Bosmer somewhat. However, what is immediately noticeable are his dark eye sockets. Some players claim these are holes. In fact, Sheogorath occasionally threatened to pluck out eyes. Yet upon closer inspection, they are simply dark - which may be intentional to project the illusion of holes.
• Pelagius’ pelvis bone has already undergone a world tour. The path is documented from High Rock via Cyrodiil to the Howling Halls. It is said they were also exhibited within the Museum of Oddities in New Sheoth.
• As long as one remains within Pelagius' psyche, access to the inventory, map, magic, favorites, and skill menus is unavailable. Hotkeys are also non-functional.
• Along the path to Pelagius the Suspicious, Sheogorath speaks regarding Pelagius' mother. This constitutes a rare statement, as very little information regarding her exists throughout the entirety of TES lore. Sources even diverge regarding her name. Notable is the indication that she was a Septim. Since the Septim blood also originated from the father Magnus, this would represent a case of incest. This would constitute another potential cause for Pelagius' mental abnormality. Previously, it was assumed that the enchantment of his amulet was the sole cause of his mental abnormality. However, Sheogorath's statement could also merely imply that she was a Septim by marriage, as according to certain sources, she originates from the Direnni clan. Alternatively, it is possible that Sheogorath distorts facts, fantasizes, or lies.
• Entering the arena is impossible, and reaching Pelagius is likewise unachievable. Behind the gate beneath the stands is merely a wall.
• The chest located behind the campfire cannot be opened.
• Southeast of Pelagius' bed, a solitary door stands within the landscape, leading to the "Mind of a Madman" (accessible solely via console command tcl). It can be entered, revealing two half-finished rooms.
• The ghostly Self-Doubt entities occasionally combat one another. This exerts no influence upon the task resolution, however.
• During the quest, a specific variant of the Wabbajack is held in one's hands, intended solely for the triggers of the quest.
• Upon returning to the Blue Palace, proceeding further along the corridor reveals a skill book located two floors below.
• Following the completion of the quest, a random encounter may occur anywhere with a female worshipper of Sheogorath who requests to be struck with the Wabbajack.