...Night Head...
you know the animation for Night Shade, for gens 3-5 changed from "weird wobbly screen" to "projects a larger version of your sprite"
Maybe this was the thought process and only gens 3-5 were able to like show it off? It's not any specific reference or phenomenon, it's just like...the idea ofs eeing a spooky head. at night. Represented by the trio of Pokemon who are basically just giant spooky heads.
If you take that idea it also kinda explains Xatu & Ariados: they have facial elements on their body. It's actually a surprisingly recurring bit once you're looking for it: Duskull & Shuppet are basicalyl floating heads (and also spooky); you could extend that to the Litwick line too since their bodies are also their heads. a scary head woudl show up in a nightmare and Darkrai can also just pahse in & out like a ghost anyway. Blacephalon's just a head joke. Cursola may as well be a head.
Obviously there's some that just get it because they want a weird move, and some who dont fit at all and...well...Chatot. Which.... I guess doesn't really help anything....
Course at this point Night Shade is now "weird ghost energy", animation wise. Kind of seems like there wasn't anything written down for this....
Carddass (Those set of cards drawn by Sugimori depicting Pokemon using attacks) for Gastly is just it.....s-sitting there? And the background's a little pixely? Not actually doing anything. But Haunter does the same thing for Hypnosis.
The anime just kind of shrugged and had Gengar shoot eyebeams and just stuck with that for 20 years
The various mangas have done things ranging from ghost beams, vauge spectral energy, getting REALLY bright, giving yo ua headache in pain and just Haunter scaring people (How I Became A Pokemon Card)
I think that's a totally valid interpretation and we might be... both right?
My thing is, and I usually dislike when people do this line of argument but I feel it fits here, is if it were truly just making a larger mirage of your head for intimidation / unnerving purposes, Stantler should really learn it. I think it works to highlight this because Stantler is a Gen II Pokémon and Night Shade is the gen where they gave this move to a wide variety of types, and particularly because Hoothoot learns Night Shade yet Stantler doesn't. Hoothoot and Stantler have fundamentally similar design concepts and their movepools reflect this, as both learn Hypnosis, Dream Eater, and Nightmare. In fact, they're the only non-occult (Ghost- or Psychic-Type Pokémon) to hold this distinction, besides Persian who does so via breeding with Stantler itself. Not only that but their movepools are very similar -- Hoothoot learns Hypnosis at level 16 while Stantler learns it at level 15, and both Stantler and Noctowl learn Take Down as one of their last attacking moves (for some reason the Hoothoot family learns Confusion really late but that's it).
The distinction between their movesets is that Stantler learns Confuse Ray, while Hoothoot learns Night Shade. Confuse Ray is used by morphing the world
around the two combatants, which is what Stantler's dex entries state that it does.
"The curved antlers subtly change the flow of air to create a strange space where reality is distorted." - Gold.
By contrast, it's implied that Night Shade is a more direct telepathic hit that does not distort space, as Stantler does not learn it. I'd argue this is consolidated by the Noctowl family's later addition of Extrasensory, a move with an extremely heavy association with telepathy in its own right. The Pokémon who learn Extrasensory are things like Ninetales (kitsune are telepathic), the legendary beasts (telepathic in movies), the legendary birds, the Lake Guardians, Reshiram and Landorus / Tornadus (but not Thundurus). If Noctowl can learn Extrasensory, it is telepathic in its own right, and that could go further to prove this distinction between Night Shade and Confuse Ray. After all, Stantler can only learn Extrasensory via breeding with a Pokémon that already has telepathy, similar to it learning Disable via breeding.
This feels like a maths problem, but I'd basically argue that this is a proof that there is a distinction between Confuse Ray and Night Shade, and that the surrounding material argues that Confuse Ray distorts space around the opponents where Night Shade does not, and is therefore still a telepathic hit. Noctowl has never learned Confuse Ray, besides, and that's relevant because it demonstrates that it doesn't have spacial distorting capabilities, and so its Hypnosis capabilities have to be telepathic. The animation in gens 3-5 can be chalked up to what is a valid use of doing this, which is making the user seem more intimidating or dangerous than it really is. That would certainly explain Pokémon like Ariados learning it, as a reference to arachnophobia, but it's not the only way that the power could be used, keeping the explanation relevant to other Pokémon that learn it like Noctowl, Deoxys, Sableye, Jellicent, and Cofagrigus.
But I mean, this information is entirely just not given to us. I think the simplest explanation is that it was never documented how exactly this move works, as you said yourself lol. I just feel that the name coincidence combined with all of this working out really does argue that it is telepathy-based.