He HAD to have known Vic was alive--and ignored it because he didn't like the way Vic looked.
I disagree, not in the sense that your reasoning is flawed from an in-universe point of view, but because this is a case where we need to step back and unsuspend disbelief for a second.
Two things are happening in this episode. One is a silly bit of escapist entertainment. Actually, it is escapist entertainment within escapist entertainment, since this is one of those episodes that was meant as a break from the tension of the Dominion War.
The whole situation that imperils Vick is so contrived as to not be worth a second thought: it's just a pretext to get the crew together for this light-hearted caper in the holodeck, a variation on the "safety protocols have malfunctioned" theme.
The other thing that is going on is that somebody's malaise with how blithely utopian Trek tends to be is being expressed via Sisko's dislike for the Vic's lounge holodeck fantasy. Maybe it was Avery Brook's (probably, from what I gather), though I guess it could be the writer's, or just a desire to follow up on Far Beyond the Stars. So, this injects a would-be serious subplot into the episode.
The two don't mix effectively, but it doesn't follow that it makes sense to call out Sisko on his callousness toward holographic lifeforms. That's mistaking clumsy writing for psychology. For example, when Cassidy convinces Sisko, it isn't by reminding him that a sentient lifeform is in danger and he must respond. She just tells him to lighten up and play along. That's because that's what this episode is, just a lark, not unlike Take Me Out To the Holosuite.
The threat to Vic's life is not meant to be taken seriously, and is not taken seriously by the writers as they deal with the Sisko subplot: in these scenes it's just a question of whether Sisko will play with the rest of the kids in the sandbox or not.
One of the few DS9 episodes I would just as soon delete entirely.
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