What does dealing with fictional stories involve at a cognitive level? A capacity that has received ample attention in this context, both from psychologists and literary scholars, is “theory of mind” or “mindreading.” A dominant tradition in cognitive literary scholarship, mostly associated with Lisa Zunshine's work, puts particular emphasis on the importance of “recursive mindreading” or “multiple-order intentionality” (A thinks that B believes that C wants …). The current paper first discusses the key claims of this tradition, using passages from Virginia Woolf's novel Mrs Dalloway as illustrations. Next, textual analyses are offered of three excerpts from more recent literary texts; two by Haruki Murakami, one by Dave Eggers. Discussing these examples reveals various merits of applying recursively embedded mindstates in a framework for literary analysis, but also shows how it is problematic. While some interesting insights into structural properties of a text can be gained, it is argued that recursive mindreading falls short as a model for the cognitive tasks readers of a text have to complete. An alternative framework, based on narrative spaces/blending theory, is suggested and discussed. Overall, the article shows how literary analysis cannot only benefit from the application of ideas from the cognitive sciences, but also the other way around: narrative excerpts can provide detailed “test cases” for psychological models and theories, thereby casting light on their strengths and weaknesses in ways research within traditional paradigms cannot do.