As a game design implement, I don't see any problem with a sanity meter (preferably one that is transparent to the player) or any other emotion construct that restricts or enables the character in a way the player is not (exempli gratia, the frustration meter with which player Tanks contend in L4D Versus).
Regarding the original Sanity stat in Chaosium's Call of Cthulhu pen-and-paper RPG, I think they modeled it poorly off classical hit-points, where one has a quantity of Sanity (100% = sane) which gets reduced by revelations, creepy environments, hardship and so on. A better model (one closer to modern psychiatric models) would have been to start sane characters at zero and then have Insanity accumulate, limiting the player's actions (by prohibiting or requiring specific behaviors) until these restrictions render the character inoperable.
Regarding the suicide ultimatum of Sanity in Dark Corners of the Earth, I only encountered it in the statue room, in which sanity is being magically drained, and I found it a frustrating element of the game while I was simply trying to solve the puzzle. There were other points in the game I remember learning how to operate with woozy-vision just because it was plain not letting up. Meh. My complaint was not that it was inconvenient, but because the poor Jack Walters was so mentally fragile. Walters did not fare well through his studies of the arcane.
Insanity by revelation does occasionally appear in real world, usually to philosophers and mathematicians thanks to thinking too hard. Bertrand Russell, for example, was broken by his efforts contributing to Principia Mathematica [http://en.wikipedia.org/wiki/Principia_Mathematica]. But then again, I broke my own head writing AI in the '90s. Still, while I can find the magnitude of the universe daunting (this blue speck on which we live is even smaller in comparison to our universe, than a bacterium, or even an atom is, compared to the Earth. We're really tiny.) Yet, not only do most humans cling to belief systems of self importance, of natural agency, and divine anthropomorphism, but do so even in the face of observations to the contrary. I would hypothesize it is due to our strong social instincts that we make such evidence defying presumptions: we protect our own sanity via insanity, by denying the truths that might make us insane.
U.
