"I don’t think there is such a thing as a funny rule, although there are funny fictional consequences to rules. (I welcome counter examples to this claim!)" Sure: QWOP. There's not much to the fiction, and I know that the rules are funny by themselves because when I describe them to people, they laugh. To the larger point: I think you're making a fairly weak claim at this point. Basically, that people only feel empathy for depictions of people, which is undoubtedly true. And at the moment, most games depict people through fictional elements rather than mechanics. Some games do depict people through mechanics, though. The Sims, for example. I can't say a Sims game has ever made me cry, but I have found it upsetting when, say, a Sim gets into a state where she's too depressed to eat or sleep. That state arises because of the game mechanics. You could claim that the emotion actually comes from the player's internal fiction, but it'd be more of a stretch. When you get down to it, all emotional reactions to fiction depend on the audience's internal associations. The Sims are pretty crude representations of people. But it's entirely possible that a more sophisticated representation along these lines could inspire real empathy through mechanics.

This seems like a really useful framing. But I think the distinction is a bit fuzzier than you're making it out to be. What about make-believe? When I was a kid, a lot of the playing we did was essentially using ourselves as dolls. We'd each pick a character and play out stories. There weren't necessarily any props involved - just a bunch of girls running around yelling "Now we're married! Now you're dead!" and such. They were very environment-based, though. Usually they took place out in the woods or some other vaguely mysterious location. Unquestionably first-person, but more doll-like than toy-like. Like you suggest, it's interesting to compare this to the kind of games I enjoy playing now. The only games I can think of that scratch this particular itch are RP MUDs and, in a different way, Bethesda RPGs. I don't really think of the latter as playing with swords or guns; I think of them as playing with an environment. Like the way we used to explore the woods in character.