This idiom is about a silly man named Du Hsuan and how he found a snake in his cup of wine when he attended the magistrate's party. The magistrate was a man who loved to encourage his guests to drink so Du Hsuan had no choice but to comply. Shortly after, he got sick...really sick. He called the doctor, but the doctor could not properly diagnose his problems.
The magistrate thought it was a bit strange that Du Hsuan disappeared for a while so he paid the sick man a visit. Du Hsuan INSISTED there was a snake in his cup that night of the dreadful party. The magistrate was curious so he returned back to his mansion and contemplated the scene of the "crime." He poured himself another cup of wine, and saw...to his amazement, the reflection of a bow that was hanging on his wall. That darn reflection was the reason Du Hsuan thought he saw a snake in his cup.
The magistrate went back to Du Hsuan to reveal that there was never a snake in the cup...it was just the reflection of a bow. And just like that, all of Du Hsuan's "symptoms" disappeared.
Was he sick or not? How can the fake symptoms seem so real?
MORAL OF THE IDIOM: Our mental state state has a very direct effect on our physical state.
In other words, the placebo effect is real. So real. Chinese folks will also use this to describe somebody who likes to scare the shiet out of themselves. I give the "Bloody Mary" example because its a dumb game I used to play to scare myself. That's a literal example of me trying to look for a snake in a cup.