How would this NPC bad guy react?

[ExploderWizard]

Crazy people who attack at the drop of a hat tend not to live very long, nor do they become pirate captains. They become thugs and attack dogs, used by their betters.

This.
Psycho is good but combined with an obnoxious short temper doesn't leave as much room for great RP opportunities while remaining true to playing these characteristics. Psychopaths tend to work as better leaders when they are intelligent, calculating and generally more reserved (at least to outward appearances)

A short tempered psycho makes a great first mate that is likely to anything if the captain isn't there to contril him. A movie analogy of this setup is the 1997 film, ConAir. You have a calculating psychopathic leader in command of a bunch of desparate thugs who would behave much differently if they were not so afraid of thier "captain".

In your scenario perhaps this "captain" is really a really bad dude under the command of the real captain who is posing as a regular crewman. This would allow him to coldly observe what happens without all the attention (and violence) fixed on him while allowing his orders to be known through "suggestions" he makes to the "captain".

 

[NewJeffCT]

Crazy people who attack at the drop of a hat tend not to live very long, nor do they become pirate captains. They become thugs and attack dogs, used by their betters.

Psycho pirate guy is going to want to have his fun, here, once he figures out what's going on. Especially since he's surrounded by his loyal men and most of the people in the tavern probably are pirate scum as well.

Something like:

Pirate: "Oh my, what's this? A family reunion? Gnarg, isn't that touching?"
Gnarg the gnoll: "..Gnarg.."
Pirate crew: Laughs.
Pirate: "Me last family reunion was with me dear father? What was it he said? Oh, yes. (deadpan) Eargh, no, no, please God stop it, aauugh. Now this, though, our buddy Rockeater deserves a party, right crew?! "
Pirate crew: Hurah!
Gnarg the gnoll: "..Gnarg.."
Pirate: (Eyes female PC) "And I've just found my own party favor here! Seize her, boys, don't bruise her too much... Excellent. Now, the rest of you.. are the entertainment. You look like some strong lads. Mmmm, you two. Fight until one of you stands or the woman dies, slowly. It's been a long time for you, hasn't it, Gnarg?"
Gnarg the gnoll: (tongue drops) "..Gnarg..!"

And go from there

That sounds about what I was planning - the island does have a large pit that is having a gladiatorial type combat competition going on. Maybe toss the dwarves in there?

 

[Oni]

That sounds about what I was planning - the island does have a large pit that is having a gladiatorial type combat competition going on. Maybe toss the dwarves in there?

Nobody tosses a dwarf.

 

[NewJeffCT]

Nobody tosses a dwarf.

I definitely have to get that line in the game!

 

[NewJeffCT]

In my opinion I doubt he would get involved unless the PC's involve him, then his evil psycho side rears it's ugly head.

What does "dressing like a pirate" mean in this context anyway? We'll I know what it means - striped trous, earring, loose shirt open to the navel, ... but I'm not sure if the nephew would mention it.

Well, dressing like a pirate also means hiding holy symbols of good-aligned gods - especially the anti-slavery god of freedom when many pirates make their living selling slaves to the oppressive slave-trading theocracy nearby... that sort of thing.