Rainbow Obsidian helps you to identify your own flaws and gives you a clear picture of the changes which are necessary to turn them into strengths. It can also be used psychically to enhance clairvoyance and is an excellent scrying stone (apparently Nostradamus used Rainbow Obsidian to foresee all his predictions). It is said to work by grounding out negativity to let light in.
It is useful when used to help soften and ease the effects of shock or fear.