Nintendo has been awarded a patent for a sanity system for video games. From the patent filing via GameInsider:

A video game and game system incorporating a game character’s sanity level that is affected by occurrences in the game such as encountering a game creature or gruesome situation. A character’s sanity level is modified by an amount determined based on a character reaction to the occurrence such as taking a rest or slowing game progress and/or an amount of character preparation. That is, if a character is prepared for the particular occurrence, the occurrence may have little or no affect on the character’s sanity level. As the character’s sanity level decreases, game play is effected such as by controlling game effects, audio effects, creating hallucinations and the like. In this context. the same game can be played differently each time it is played.

I remember a few years ago reading a preview of a Call of Cthulu video game that used a system almost identical to that one.

BTW – the pic is the Danvers State Hospital (fka State Lunatic Hospital in Danvers) of which Lovecraft wrote.