It could decrease when you rob homeless men or when you start to starve. To increase it you could socialize with NPCs or save people. Personally, I want the stat because I find it very weird how at the start of the game you can randomly chose to eat your grandpa. I feel like it would be more fitting if cannibalism was locked behind a low sanity stat until you get a trait for cannibalism which lets you eat human flesh whenever.
The way I imagine it is that you choose between eating your grandpa at the beginning and depending on your choice, you'll start with a different sanity value. The sanity stat would be very difficult to change, with some actions only adding/removing 1 sanity point. Depending on how low your sanity stat is, you would be capable of doing more extreme actions. The downside to having a low sanity stat is that some NPC interactions won't be available because you are too insane. If sanity hits 0, then it is game over.