Solved! I discovered this.
OS X has something called a Launch Services Database. It's to make it easier for an application to launch another application, without using the Finder. You can tell if it's messed up by right-clicking on a document, then selecting "Open with...". If multiple versions of the same application are listed (say, multiple versions of Preview, Photoshop etc when right-clicking on an image), then your database needs repairing. To rectify, I closed all open applications and then launched Terminal from Macintosh HD > Applications > Utilities. and copied and pasted the following command at the Terminal prompt and press Return to execute it:
/System/Library/Frameworks/CoreServices.framework/Frameworks/LaunchServices.framework/Support/lsregister -kill -r -domain local -domain system -domain user
Terminal will appear to freeze for a few seconds as the command is processed. When it’s finished, you’ll see a new prompt appear in the window. You can now close Terminal and head back to your Desktop. Find a file you need to access using the Open With menu and you’ll now see that the list is cleaned up, with duplicate and outdated entries gone. Also I now can access PS from LR for image editing without any problems. :-)