As far as challenge in video games goes, I don't have a problem with challenging games, and I don't have problems with games were my character may die while playing a boss. Heck, when I'm playing old-school NES games to review for my blog, I die a lot (the satellite boss on Metal Storm nearly drove me nuts), but I enjoyed the game. For a more recent example, I died fairly often on Max Payne, on CoD4, and The Matrix: Path of Neo, but I enjoyed the game.
What I don't like is situations where, say, I basically run into a brick wall. In a MMO it could be having my character be set back several days/weeks/months of play because I died and someone ganked an item off my corpse, or someone ripped me off of several months works of in-game cash that I'd been saving up for a new ship, or something similar. Or, for that matter, using a non-MMO example (one I've used before), in Need For Speed: Carbon - my upgraded halfway-to-hell-and-back Aston Martin that I'd been using for most of the game got impounded, because the game hands out Get Out Of Jail Free cards and other wanted rating reducing items so sparingly (as opposed to Most Wanted were you got them regularly as I went up the blacklist.)
Now, if this had come up later, this wouldn't have been as major of a problem, as I'd been saving up for a car from the next tier up, and some upgrades for that so it would be competitive. But it didn't. So, all I had at the moment was my starting car, and a car I'd gotten from an earlier boss, neither of which were competitive in the races I hadn't gone through yet, even with Rubber Band AI. Yes, I could have gone through the races I'd already beaten, but the payouts were low enough that it would become a horrific grind, one that would not be fun - so I stopped playing, and I've started choosing my future racing game purchases to avoid similar problems, and if I start getting into MMO's more heavily (I'm currently playing DDO and Neo Steam), I'll make my decision in terms of the pay MMOs on (among other things) the same basis.