Basically, almost all of the research so far shows that we react to virtual stimuli exactly the same way as if it were real stimuli-- we don't want our characters standing too close to other characters, because it's a social convention in the real world that we all have our own individual space. But we still react positively to attractive avatars, whether we know it or not. No matter how much we're supposed to be roleplaying, or how much we realize consciously that the virtual world is different from the real world, we still react in a real way to virtual stimuli. It's heady stuff, but here's Terra Nova's soundbite, by Dmitri Williams: "You can take the person out of the real, but not the real out of the person."
And Williams closes with an extremely interesting proposition, considering how the interaction works: what if, by making many parts of Outland dark and gloomy, Blizzard has caused us to react realistically and feel depressed? TN's informal survey says that players' favorite zone is Nagrand-- is that because it's sunny and green there? And if so, what does that say about our reaction to the expected upcoming expansion-- should Blizzard reconsider the dark, cold stretches of Northrend for a more tropical locale?