A few things I've noticed:
Shock is weak. Shock startles you, that's all, and even then, it wears off quickly.
Power takes away horror. If you have a gun, if you're killing enemies, what's to fear? Invincible enemies like The Puppets (Cradle) and the Hunter (Dead Space) are great because you can't fight them. You have to run or hide, two actions which naturally inspire fear.
Gore isn't frightening. Honestly, after playing, say, Gears of War 2, any horror game's attempts at disturbing the player by gore are laughable.
Raw fear is nice, but dread is so much better. Sure, a pack of monsters closing in on you is frightening, but whatever, it's over soon anyways. But dread lasts. Dread is stronger. Fear can make a player afraid, but that's all, and they'll keep playing as normal. But dread can make a player refuse to go on.
Dead Space had dread at the start. Much of the place was unpopulated, lots of shadows and sounds but only just enough enemies to let you know what they were right. That was the brilliant part of the game, the true horror section - I remember inching along slowly, expecting, at any moment, for a necromorph to drop down. After that it was simple blah blah shooting monsters.
Dead Space's mistake was throwing more monsters at you, and giving you weapons. The fear goes away when you're carving lots of monsters apart with a saw.
The Shalebridge Cradle is brilliant for the reasons I've outlined above, which I'll re-iterate here along with a few additions.
- Dread. The entire first section is nothing but that. Creeping in the shadows, reading disturbing medical reports, etc. Then flicking on the generator, whimpering at how loud it was and hoping nothing inside heard it.
- Invincible enemies. The twitching, clicking Puppets. You can't kill them. You can knock them down, at most, with some flashbombs or fire arrows, but they'll get back up if you touch them. And if one sees you, it kills you, running impossibly quickly. You cannot escape it if it spots you.
- There is no shock. None. The most you might get is accidentally running into a Puppet, but that's not intentional. Nothing jumps out at you.
- The player is truly frightened. I think all of us who played the Cradle for the first time, in the dark, with no outside noise... I think we all had to take a break, and I think some of us contemplated just setting the game aside and not touching it again.
- The entire game sets you up for stealth, the feeling of hiding. And then you enter the Cradle, and again are forced to hide... which makes it all the more frightening.
More aspiring horror developers need to play through Thief DS and examine the Cradle closely, because it's as good as fear has ever gotten.