Clinical psychologists are often asked to make recommendations regarding a client’s ability to function in everyday activities (e.g., work, classroom, or shopping). Common approaches include a combination of paper-and-pencil (including some computer automated) assessments, behavioral observations of the client’s performance during testing, and self-report measures about their perceived deficits. From this combination of assessments, observations, and self-reports, the psychologist is expected to make predictions about the client’s ability to return to the classroom, return to work, and successfully complete other activities of daily living. While there are advantages to this approach, there are also some shortcomings—perhaps most notable is the lack of ecological validity. Recent advances in virtual reality technologies allow for enhanced computational capacities for administration efficiency, stimulus presentation, automated logging of responses, and data analytic processing. These virtual environments allow for controlled presentations of emotionally engaging background narratives to enhance affective experience and social interactions. Within this context virtual reality can allow psychologists to offer safe, repeatable, and diversifiable assessments of real word functioning. Although there are a number of purported advantages of virtual reality technologies, there is still a need for establishing the psychometric properties of virtual reality assessments and interventions. This review investigates the advantages and challenges inherent in the application of virtual reality technologies to psychological assessments and interventions.