I used the Flute of the Outer Gods ("Lose 3 Sanity and 3 Stamina and discard Flute of the Outer Gods before making a Combat check to defeat all monsters in your current area") to defeat the monsters on a "scientific experiment gone awry" rumour yesterday. It was very satisfying!
My question arises because I only had 1 sanity at the time. Now, I've read often on these forums that there is a difference between a "discard" and a "loss". If it said "Discard 3 Sanity and 3 Stamina" I couldn't have done it, because I couldn't meet the precondition; but since it said "Lose", I reasoned that I could take the loss of 3 stamina (reduced to 2 because I was Michael McGlen) and take a loss of 3 sanity, the first of which drove me insane and the rest of which had no effect---just as if it was a loss inflicted by an attack. So I got 6 monster trophies and went to the asylum. Yay me!
But ... was I right?
