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Versions of Reality
ELSTER: But I realize now that the deep change began on the first day I brought her to San Francisco. You know what San Francisco does to people who have never seen it before. […] She had found what she was looking for, she had come home. And something in the city possessed her.
Elster is very carefully setting the trap for Scottie by describing his own efforts to understand what's happening to Madeleine. It's all a ruse, of course. We admit that San Francisco can mess with your head (see: the 60s), but Scottie has been skeptical up to the point when he first lays eyes on Madeleine. The dialogue above happened earlier in the day, but we hear it in voiceover as Scottie locks eyes with the lovely Madeleine at the restaurant. He's instantly smitten, and his objectivity goes down the drain.
MIDGE: And the idea is that the Beautiful Mad Carlotta has come back from the dead, to take possession of Elster's wife? Ah, Johnny! Come on!
Midge is the voice of objective reality throughout the film. She loves Scottie and can't believe he's fallen for this story, or for this woman. Only when she visits Scottie at the hospital and sees how this has destroyed him does she give up. She realizes that you can't hope to win in a battle with a beautiful ghost.
MADELEINE: Where is my child…have you seen my child?
What seems to be a confirmation that Madeleine has been possessed by Carlotta was probably just some careful coaching by Elster on Carlotta's history. Scottie, who just heard the bookstore owner utter these same words, falls for it.
SCOTTIE: Not tweed—it's a smoother material, with a larger collar and belted.
Here are just a few of the explicit instructions Scottie gives as to what Judy should look like. He "knows what he wants," as the saleswoman in the clothing store says. And what he wants is to symbolically bring Madeleine back from the dead by transforming poor Judy. He thinks that if creates the look he can create his own reality.
(SCOTTIE sees JUDY wearing Carlotta's necklace and he starts to realize what has been going on.)
As viewers, our reality changed after the revealing flashback, but we knew what Scottie did not know. Now that he knows, how does our reality change again?
SCOTTIE: Not just the hair and the clothes! The look! The manner! The words! Those beautiful phony trances! That jump into the Bay! I bet you're really a strong swimmer, aren't you? Aren't you?!
Near the very end of Vertigo, Scottie tragically realizes that he's been deceived. Note that "beautiful" and "phony" go together here; Scottie's finally figured that out. Scottie's out of his mind with anger. We can't blame him—not only has he lost his fantasy lover, but his entire interpretation of reality has just come crashing down. Scottie thinks that knowing the truth will let him put the past behind him, cure his acrophobia, and move on with his life. Our guess? He's on his way to another visit to the sanitarium.
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