On the topic of horror, how do you make a grim subject matter feel silly spookville experience instead of actually scary? For example, the Luigi Mansion games, the Disney Haunted Mansion ride, the Medevil games, etc?

The counter to anything terrifying, off-putting, or grim is cuteness. This is done by exaggerating certain features that humans typically find endearing and downplaying the features that humans find alarming, while keeping the visual recognizable. This works with animals.

It works with the undead.

It works with just about anything.

Humans tend to look at a few things to determine cuteness - the main two being proportion and the removal or masking of traits that we find scary or off-putting.

In terms of proportion, we tend to look favorably on things with the proportions of children, babies especially. Babies have much larger heads relative to their bodies, arms, and legs. If the scary thing is proportioned like a baby or child, we are much more likely to look at it favorably rather than with fear. Most examples of something cute based off of something scary use body proportions closer to a child's body (or the animal equivalent) than an adult's.

Second, we reduce the "fear" factor by simplifying, downplaying, or removing any elements of body horror or things that make people feel uneasy. This typically means any markers of injury, illness, pain, danger, or just obviously unnatural. Notice the mask on the left has many wrinkles in the skin, the unnatural white eyes, the off-putting shading, the heavy emphasis on the yellow teeth and blood-red gums, and the realistic proportions that intentionally push this mask into the uncanny valley for the unease it causes. Now consider the right mask - everything is simplified, with smooth lines and the only sharp edges being on the smile itself. Bright colors, a stylized happy face, with no features that could be considered off-putting.

Combine the use of proportions with the removal of things that induce unease in the viewer, and you get something cute and less scary. This also works in reverse - take something normally cute, change the proportions, and add in the things that induce unease in the viewer and it becomes scary. Artists take advantage of our inherent mental associations with these things to make things cute or creepy.

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