AM stands head and shoulders above most other games in its handling of demons.
Other games have surrendered to evil as cool, evil as stylish, evil as emotionally deep, even evil as sparkly and twinkly, but AM takes no truck with any of that. Demons are Bad News, plain and simple. Saved is saved, damned is damned, but as long as you live you have room to go either way. Afterward, done is done.
Other games have surrendered to the lure of Detect Evil. Here, the deepest evil is undetectable.
Barring a few flaws in the AM game mechanics (among far too many), you'll never tell the difference between the fellow who only needs some compassion and a second chance and the demon who cannot help but ruin everything he comes near, even after everything has gone to hell.
It would be reasonable for you to suggest that demons do not really exist. Were you to suggest this, it would be reasonable for me to agree that demons do not really exist.
But even a game that tries to simulate reality, or simulate a reality, is at best a crude model.
I consider it a reasonable simplification, to model some real-world behavior as "maybe he's a demon," at least in AM, in which demons explicitly do exist.
A smart demon is not capable of long-term planning toward a goal. But though he cannot hold a long-term goal, he can have consistent lusts and desires. Though he lacks the patience, grit and creativity to see a plan through to the end, he can perceive short-term opportunities to seize an advantage and act upon it.
A demon is not capable of loyalty, but is quite able to demand it, by which he means obedience. He knows nothing of loyalty and therefore cannot reward it and cannot help but betray.
A demon cannot plan a person's downfall but he can want it and inspire it.
A demon disguised as a man is likely to cheat on one wife after another, is likely to fail serially at business, is likely to discard 'friends' and associates when they prove inconvenient or unnecessary and respect the law only when it to his advantage and otherwise undermine it. He might even have difficulty hiding his lust for his apparent progeny. Once he has obtained an object of his desire, he is likely to lose interest, because a demon's greed, lust and avarice cannot be slaked.
People who associate too closely with the demon are likely to suffer in ways closest to their doings in the world. Businessmen will lose money. The honest will find themselves needing to lie for the greater good. The principled will find themselves betraying their beliefs. The dignified become mockeries. The loyal snared in treason. Once they are sufficiently encumbered, they are discarded.
For the purposes of determining ultimate truth, a multi-disciplinary scientific investigation might be more appropriate. As our understanding of genetics, psychology, human development and other matters continues to improve, we will arrive at deeper, clearer answers.
For the purposes of therapy, it is probably best to approach the matter with the science that we have, even if it means that a few demons slip through.
But for the purposes of modelling reality at the level possible in a game, and possibly even for how you treat with such people in real life, maybe it's best to consider the possibility of "demon," and take it from there.
I had an amusing conversation with a gaming friend of mine once about this. He was having a little moment about how Ars demons have to be evil and how this was (somehow) the common, easy way to do it.
So I asked him what games had angels as super powered trenchcoat antiheroes, God as an uncaring and demons as evil but tormented by their choices. He named me a couple. I then asked if any other game actually had demons being subtle and invisible in their attempts to steal souls rather than pursue evil because it was evil. He couldn't name any bar Ars. He couldn't quite get that it was Ars that was the more unusual of the games.
I bring it up in that way because your initial post seemed to have a lot of assumptions about the real world nature of evil that it was congratulating AM on getting right. Given that migh primary issue with AM5 is that it models too much of a "one true way" approach to religion this was... disturbing.
It isn't universally agreed in the real world that evil even exists.
But the concepts of good and evil have endured because they are useful, though possibly grossly incorrect oversimplifications of a far richer and more complex reality.
As for the assumptions in my first post about the real world nature of evil, I don't notice many, beyond the possible suggestion that evil can enter the world in forms that seem stylish, cool or sparkly. considers Oh, and the suggestion that there is no way you will ever have much success trying to detect evil.
I know a number of philosophies and religions who would disagree strenuously with this. Aside from the nature of demons "saved is saved, damned is damned" is pretty unique to Christianity. Maybe Islam- I don't know it well enough to be sure. Even Catholicism allows for purgatory, though that could be considered a form of saved with delays for bad behavior...
I know a number of philosophies that would disagree strenuously with anything.
It may even be the case that I am part of such a tradition.
But we are talking about a game, since this is a game forum and all. Leaving aside the possible real life advantages of reimagining certain people in one's life as demons, and the real life possibility that some people might really be demons, and the real life possibility that the increasingly common trope of "sure he killed people, but he's hot and he can't help it and he's mostly better now" might actually be downright harmful, we can consider the main focus, which is demons in games.
Demons in AM are more interesting that other demons rather than less interesting. For one thing, they are different. Note "increasingly common trope." For another, having a certain kind of character who simply cannot change still allows for the many kinds of character who can. This opens up the possibility for stories involving characters who cannot change.
The inability to detect the nature of demons is also superior. It is also more realistic, in the sense that characters both in AM and in the real world have to make decisions about what is right based upon limited information, which includes personal experience, indoctrination acculturation and personality.
For Mythic Europe, in which Christianity is not only the dominant religion and cultural influence by far, but is also completely true (even if that doesn't quite mean what most people think it does), this representation of demons is both superior and essential.
Putting it all together, and playing it that way, you have a world about which you know very little, in which a dire Enemy is out to get you, and your only hope is God, of whom you are obviously not worthy, yet who extends the possibility of salvation anyway, through the imperfect and human institution of the Church. Demons are real, they want you to suffer, they will never stop and never change, you cannot detect them, but you have a lifeline.
The superiority of AM demons doesn't end there: Most games already have AM demons. I don't mean only AM games, or supernatural fantasy games. I mean most campaigns of all kinds. You haven't noticed this? Of course you haven't: AM demons are not easy to detect. But nearly all games have at least a little bit of railroading, and many have a lot. And any NPC villain whose behavior cannot be changed might as well be a demon. He does bad things, and for all practical purposes it it utterly impossible to have him behave differently. His ability to react to the PCs is extremely limited by his nature, which is to say the story, which is to say the GM, which is to say that it is ordained by God as part of the Divine Plan. You know, because a good story makes a better game.
Explicitly adding an AM-style demon to your toolkit opens up the possibility of becoming more conscious about railroading. If the NPC can't be persuaded to mend his ways, maybe he's a demon! AM5 also offers faeries who explicitly act as NPCs (oh so very meta). What, you don't want to have that kind of character? If it's quacking like a duck, it might as well be a duck.
I have to say I also really really like the Ars Magica 5th edition depiction of demons. For me it boils down to this:
ArM5 demons are opponents of superhuman skills, intelligence and powers ... but they are also fundamentally crippled, so you can defeat them without resorting to some external help.
The crippling is the direct immediate consequence of the fact that they are "evil". Not in the sense that since they did something evil they were "punished" and are now crippled as a result; instead, in the sense that being fundamentally evil is in itself fundamentally crippling. And it's crippling in a way that makes, in game, perfect sense: if you really have not a sliver of the basic virtues (Temperance, Hope, Faith etc.) it's exceedingly hard to do what even a 10-year old could do. I find this quite original in the rpg scene, and extremely elegant.