Placebos are not inert, but exert measurable biological effects. The placebo response in psychiatric illness is important and clinically relevant, but remains poorly understood. In this paper, we review current knowledge about the placebo response in psychiatric medicine and identify research directions for the future. We argue that more research is needed into the placebo response in psychiatric medicine for three broad reasons. First, awareness of factors that cause placebo response, for whom, and when, within clinical trials will allow us to better evidence efficacy of new treatments. Second, by understanding how placebo mechanisms operate in the clinic, we can take advantage of these to optimise the effects of current treatments. Finally, exploring the biological mechanisms of placebo effects might reveal tractable targets for novel treatment development.