The Buddhist tradition and the field of Western psychology define the "self" (or ego) in similar ways. They agree that the self is not something a person is born with; it is therefore not an inherent human trait. They both see the self as something that develops over time in response to one's interactions with others and with the environment. They agree that the function of the self is to integrate our subjective experiences in order to provide us with a sense of internal cohesion and personal continuity (personal continuity is the sense that "I" am the same person from one moment to the next).
Buddhism teaches that the self we perceive as a solid and integrated entity is, in reality, just an illusion. If we focus our attention on our internal experiences, we will eventually see that this "self" is nothing more than a collection of experiences - of thoughts, feelings, attitudes, and sensations - that arise and then pass; there is no permanent substance or structure - no "self" - underlying these experiences.
This is, in fact, quite consistent with many of the mainstream theories underlying Western psychotherapy practice. Psychodynamic and constructivist theories suggest that, for each person, the sense of self is achieved through the interactions of many different "self representations." A self-representation is an unconscious collection of related schemas (ideas and beliefs) that produces a particular experience of the self in a given moment. A person has many self-representations and any of them can be dominant at a given moment in time. Thus, the "self" one experiences "is actually being constructed anew from moment to moment" (Jack Engler, "Therapeutic Aims in Psychotherapy and Meditation").
In short, when we talk of the "self" in Buddhism or of the "self" in Western psychology, we can be sure we are talking about the same concept. The differences in how the two traditions deal with the self is not in how they define it; rather, it is in the role each believes the "self" plays in human lives and human functioning.
Whereas Buddhism sees the self as the primary source of all human suffering, Western psychology sees it as necessary for healthy functioning. Buddhism teaches that suffering can only be alleviated when a person realizes that what he perceives as a cohesive, integrated, and continuous self is only an illusion and that it disappears under close scrutiny.
In contrast, Western psychotherapists see the lack of a stable, integrated, and cohesive self as a major cause of suffering. A self without cohesion is fragmented; complete fragmentation results in psychosis. In less extreme forms, a loosely cohered self caueses a person to experience a deep sense of emptiness accompanied by desperate (but unsuccessful) attempts to fill it. Western psychotherapy practice seeks to alleviate suffering by strengthing the self, fortifying its boundaries, and integrating its various components.
Which tradition is right? Do we suffer because we believe in a self that doesn't exist? Or do we suffer because our self needs to be integrated and strengthened? And how is it that Western psychotherapy borrows from Buddhist practices that seek to accomplish the exact opposite of what it aims to achieve?
There are some psychotherapists who make this very point and argue that Buddhist practices have no place in psychotherapy. Others embrace Buddhist teachings and practices wholeheartedly and use them as the foundation for their psychotherapy practice. Still others believe that Buddhist practices have a place in psychotherapy but caution against using them as substitutes. Practices like insight and mindfulness meditation are not equivalent to psychotherapy. In fact, as we've already established, while meditation and psychotherapy both aim to relieve suffering, they do so via fundamentally opposite strategies.
I think it is interesting to note that Western psychotherapy borrows from Buddhist practices, but not the other way around. Buddhism borrows nothing from Western psychology. When Western psychotherapists use specific Buddhist practices as interventions they use these practices outside of their original context. They do not use them as they are used by Buddhists. Buddhists engage in various types of meditation with the ultimate goal of achieving enlightenment (which also brings about freedom from suffering). When a psychotherapist teaches a patient to engage in mindfulness meditation he does not do this in an effort to help this patient see through the illusion of self to become enlightened. Rather, he hopes that insight (Vipassana) mediation and mindfulness meditation will help the patient to build ego strength. He hopes to strengthen the patient's "self" by teaching him to observe his thoughts and feelings objectively, to approach his internal experiences with acceptance, or to recognize the role that identifying with maladaptive thoughts plays in generating negative emotional states. These are all functions that Western psychology traditionally ascribes to the ego. These are all worthwhile endeavors but they are not goals that are pursued within a traditional Buddhist framework.
I suppose there is a bit of irony in how the West has chosen to embrace Buddhist ideas. We adopt Buddhist practices in an effort to achieve goals that are completely at odds with the fundamental tenets of Buddhism. This is at least the case in terms of using Buddhist practices as psychotherapy interventions. In reality, to do anything more would require a complete change in worldview for everyone involved.