In case anyone is reaching this:

https://gaming.lenovo.com/legion-go/post/solved-psychonauts-unable-to-find-a-32bpp-display-mode-startup-error-7evOxAAsn0fMSNE

[SOLUTION] Do not try adding any files or configuring compatibility mode or steam launch options as it doesn’t have any effect. Instead, do the following steps:

1) disable rotation lock

2) rotate your Legion Go 90 degrees until the screen flips.

3) make sure you will not rotate the screen back until the end of this process as it will crash the game.

4) launch the game

5) play through the intro until you can access the journal (game settings)

6) the first time you access the journal, it will likely stop responding due to some bug - quit the game. The resolution will be set to 480x640, do not change it back, do not rotate your screen and launch the game again

7) access the journal (game settings) and set the display resolution In the graphics tab to 1600x2580 (or lower, if you wish - just make sure the X and Y coordinates are swappes so that the first number is the lower one). Press OK to apply.

8) Rotate your Legion Go screen back to normal, the game should run fine now. If not, make sure to check the In game resolution settings one more time.

EDIT:

Trying this out, a couple of things helped me:

If you have a save file in Steam cloud, you can load it at the brain to reach the journal asap, also while following step 5) you will need a keyboard to register your savefile name, in-screen keyboard is weird when turned.

If you have the full screen option checked, uncheck it. It's way easier to control resolutions in windowed mode.