The Lost Tapes, along with original iceberg theories themselves, are ultimately a reflection about the Nostalgia Filter and the human condition in relation to that.
The "personalization AI" is a personification of the countless dreams children growing up with Super Mario 64 might have experienced after playing the game. In these dreams, a person might see things in the game being expanded upon or warped slightly, only for them to wake up and realize that "IT'S NOT REAL," just as the AI insists when the Wario Apparition tries to attack the player a second time. Once they grow older, it becomes difficult to remember what was and wasn't a dream, leading to the false diagnosis of Fake Memories and crackpot conspiracy theories to explain them. The Nostalgia Filter itself also kicks in, with these people remembering the game as being more open-ended than it already is, and the story of the AI itself blames the rise of emulation and reprisals sending that nostalgia into a brick wall as the AI fizzling out in the face of modern technology and present-day players collectively "agreeing" on what the reality of the game is.
But the above doesn't address a more pressing question: Why the Psychological Horror aspect of the Tapes, and other series like it? The easy answer is that it's a Deconstruction of ridiculously-advanced Artificial Intelligence, with the AI spending months if not years full of existential dread, staving off corruption either literally or metaphorically and asking itself if it really wants to be this way. But the deeper answer is that it's an extension of the central theme about memory and the perception of it. Every single time the AI brings back a feature allegedly cut from the game, it is digging through garbage data and unfinished assets - essentially half-formed, cast-aside memories - to resurrect it, a process that apparently causes much pain. Think of it like this: ever had a memory of something awful from your past resurface involuntary, resulting in an uncomfortable train of thought? That sort of discomfort is what the AI ended up going through constantly on a regular basis. Everything cut from the game in this fictional history, by definition, was axed for a reason, and the AI's psychoanalytic functions have somehow led it to dredge through this uncomfortable past in hopes of bringing kids joy; alas, it was quite obviously never meant to be. The Nostalgia Filter comes back at this point, as the AI bringing back these fragments as horrifying, possibly life-threatening abominations quite easily represents the whiplash of realizing a distant memory isn't what you remembered it as.
Of course, the filter doesn't last forever, as some eventually come to terms with the reality of the past. After a while, the AI sends someone to succeed in one last task where it failed: kill itself. Once erased by exploiting the Internal Castle Plexus that kept it alive, the game is implied to revert to Super Mario 64 as it really was: no fourth floor, no ghost of Luigi, no specter of Wario in the castle halls, nothing truly strange about Wet-Dry World except for its offbeat geometry, nothing like that. In its final moments, while the AI dies for real, the unpleasant memories of its creation and the content that came before it are sealed for good, and while its struggle eventually fades away into The Greatest Story Never Told, the world remains open to the reality of that history and Super Mario 64 because of its sacrifice, rather than being consumed by nostalgia.
