I don't buy that psychosomatic Matrix stuff they do in dream world episodes. The way you could die in The Thaw made absolutely no sense. The 'If you think you die you die' stuff is just a scifi plot contrivance to add danger to virtual world stories.
I agree the emotional experiences would feel real, IF, as in O'Brien's case, you believed the simulation to be reality. If you knew it all to be fake, you knew it would not leave lasting physical damage and that it had a definite end date, you would not emotionally react the same way.
Consider these scenarios:
A) A person walked up to you and said "I am going to punch you for five minutes, then I am going to stop. It will be very painful but I will not beat you bad enough to actually kill you or leave any permanent physical damage.", and you had reason to believe he was telling the truth. Then he did so exactly as promised.
B) A person walks up to you and starts punching you, without telling you anything. Then after five minutes he stops.
I would argue, B would be a lot more emotionally traumatic for you. In the case of A you can mentally prepare yourself for exactly five minutes of punching. You know exactly when it will be over and you know you will not die. In B, you don't know what's going on, you don't know when he's going to stop or if he's going to stop, and you don't know if he's going to leave you alive. Also you don't know whether it's going to happen again in the future.
Part of the psychological effect of torment happens because your brain and your emotional and physical reactions readjust themselves to deal with the torment, and then they can't readjust back after. If you knew it was fake, and knew exactly when it was going to end and you would not suffer any permanent damage, your brain would not readjust itself the same way, and simply brace itself for the specific amount of torment it knows it will receive.
And you know there's got to be criminals out there who know what it's like, have figured out ways to endure it better, and tell their buddies all about it, so that's even more mental and emotional preparation.
What would happen if somebody (convincingly) told you that all you life was just a fake memory induced by technology? Would this change your personality and state of mind because of those experiences and memories. I would guess no, you would still be the same, especially when they would (convincingly) tell that the responses to stimula were really your own.
Of course it wouldn't change my personality. But, moving forward, knowing it was all fake, my personality would develop far differently than it would if I did not know. It's all about whether you know it's fake during
the experience or not.