I just wrote out this whole thing and then my internet died and I lost it all. So here it is again.

"Breaking the 4th wall" is a theater phrased used to describe an incident where a character interacts directly with the audience or somehow acknowledges that they are a made-up character in a play. It is usually meant to be comical.

Although it is mostly used in theater, the concept applies to any type of story-telling. Now I've noticed that most RM games I've played have moments where characters break the 4th wall. They say things like, "Don't worry about such-and-such, this is only a videogame!" The following are my opinions on how and when to break the 4th wall effectively.

1. First off, I highly suggest that you establish the reality of the gameworld before you break the 4th wall. You need a well developed world with which the player feels familiar. Otherwise the player is likely to think, "Oh yeah, this is just a videogame," and then the chance of getting them really engrossed in the story becomes jeopardized.
   
   On that same note, don't break the 4th wall too often. I can think of three mainstream RPGs right now that break the 4th wall. One is FF9 about halfway through (optional). The next is Secret of Evermore, which has a well hidden Easter Egg about 5 hours in. The last one is Xenogears, which does it twice after about 15-20 hours of play. It doesn't happen often, and doesn't tend to happen early on.
   
   
2. Next, finish the joke quickly. I think it is best to give it a quick break, let the player have their laugh, and then bring things back around to normalcy again. Long scenes of breaking the fourth wall are usually distractions from the main action. It makes the break "too real" for the character, like they are actually aware that they are in a videogame. The character should instead, upon becoming aware that they are in a game, immediately forget about it and continue with whatever they were doing. In general, I would try not to end a scene by breaking the 4th wall.
   
   
3. It is also important who is breaking the 4th wall. In all of the above-mentioned titles, it is minor NPCs who do the breaking. Furthermore, in SoE and Xenogears, these NPCs break the 4th wall as an extension of their own personalities! I think this is key. when you make the break, it should still generally fit with what is going on in the gameworld.
   
   Imagine the following scene. The heroes are telling their troubles to a wise monk at a monastery. The monk keeps reassuring them, "It will be ok, things will work out in good time." The heroes can't stop being anxious though, and eventually the monk says, "Worry not young ones, for we are all players in the videogame of life. Worrying will only slow you down." One of the heroes then says, "You know, that makes a lot of sense somehow," and they move along with their quest.
   
   In this example, the monk is still keeps his personality, he's just being funny while he does it. The 4th wall is never totally broken. The same thing with the heroes; they still find the courage that they were seeking all along. It would be even better if the monk was just a random NPC monk that you had the option of talking too. That way it wouldn't force a distraction into the main story.
   
   
4. Lastly, don't break the 4th wall as a form of apologetic dialog. Unless you are shooting for a total comedy, don't make your NPC say something like "I don't know what to say, so I'm saying I don't know what to say." This can make the whole gameworld seem futile and meaningless. And no one wants their game to be remembered that way.

-CS