I have a pair of 20-detent rotary encoders wired to an Arduino teensy. The teensy reads a change in one of the channels and sends a joystick button press.

The problem is that if I spin the encoder with any kind of speed, it starts to go backwards for some of those presses, and averages out to 50 forward/50 backward.

So:

1) Why is this happening?
2) How do I fix it?

My guess it the problem could be a delay between when the encoder moves and when the arduino reads it and compares it to the last known position. Currently the program runs at 200 times a second, and I think that would be fast enough to eliminate this problem at normal speeds.

The stereo knobs in my 10 year old car do this too, wonder if it has to do with the quality of the encoder itself?

Only one way to find out! I've had my eye on these for a while now: https://www.propwashsim.com/node/15

Do you know if you are using gray scale encoder? I have several in my cockpit and I have struggled to find ones that my Gamma Ray board picks up cleanly. I found that the ones a lower number of detents seem to work the best (16 or so). And like you if I spin them too fast they don't work right. However in my case they just don't register the click.