I think the whole observation thing along with the second story is Fauna basically saying that without us the viewers watching, all of them are just normal girls as seen from the stories.
However once we start to observe them, they start to become these supernatural abnormal entities with superpowers instead, with the "observer effect".
This is shown as well in the second episode, where once Bae started to get observed, and she realizes it, chaos starts to occur around her slowly, and even with Mori, starting to take on the role of Death, killing the other 2 girls.
