In the world of the Batman stories, the Asylum is named after its founder; but in real life, it is thought to have been named in honour of Arkham, one of the settings of H. P. Lovecraft's horror stories.
H.P. Lovecraft met Bob Kane, Batman's creator, in 1935 on a train. The young Kane told Lovecraft that he loved how he wrote his stories and told him about a vigilante that had literally gone insane with vengeance over something that cannot be destroyed; the essence of evil itself. Kane was so grateful for being able to meet Lovecraft only two years before his death that he created Arkham Asylum as a means of paying tribute to his hero.
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