In the woods at night with a flashlight
Horror is common ground for games to inhabit. Many games dabble with the Horror genre, some to a minor degree whilst others tackle it head on without changing course. I can't think of many Western games made that have ever done psychological horror well, most elect to favor the 'Evil Dead' inspired splatterhouse gore-orgy found in your Doom's and Dead Spaces.
Alan Wake aims for the Psychological horror region of the Horror world, and manages to be both a Wonderful horror game and a terrible Psychological game. There is an extremely limited vocabulary Alan Wake uses to purvey psychological horror throughout the entire game. Anything Scary happens at night, because of course there is a light/dark theme inherent to the story. You are near constantly beset by one of three foes, them being axe wielding smoke dudes, killers crows, and floating inanimate objects. Mix and match these elements and throw them into settings that vary from Dark Foggy Logging Forests, to Dark Foggy National Park Forest, to Pitch Black Forests outside of a town and you will begin to see a pattern. Which is not to say that you don't intermittently visit locations that aren't forests, sometimes you'll go inside buildings for a few brief seconds, or you'll be in a mine for a few minutes, or you'll be inside a maze for a good 60 seconds. But usually you go straight back to the forest to breath in some fresh fog.
The themes for Wakes story are a milieu of horror fiction that you have experienced before in other formats,which is sad because it is the story that is ultimately what strings you between each dark/foggy action set piece. The episodic format and well thought out narrative elements help pace out the monotonous 'horror' you force yourself through, and the game's excellent controls and spooky atmospher do help alleviate the familiar feelings that creep in. For a game so versed in mystery and suspense, Alan Wake has done little to establish a Horror vernacular that is uniquely its own. It does a great job of establishing a superficially spooky atmosphere, however there is absolutely nothing psychological about the horror found in this game.
While it fails at horror, the story is intriguing, if a little familiar at first. It does veer off the beaten path after setting the familiar tone for the story within the first few chapters. Somehow I kind of wished they would have nailed down a more interesting 'dark cosmic force' for Wake to combat, as 'the dark presence' is so gloriously ambiguous and patently ethereal it makes it all the easier to dispel any of its tension.
The game takes advantage of some intriguing narrative devices that really sell me on the game, more than the action set pieces can ever do. The manuscripts serve as a good set up for events you will encounter in the immediate future, helping layer on story elements and add salient flavor and character to events that would otherwise be bereft of complex emotion. Alluding to events that are about to take place in the form of pages from a missing book is a very interesting technique that feels to me like a unique spin on the concept of a flashback, especially considering the reasons within the story for why this is. It's a good tool for world building that is unique to this game. The scripted story sequences found between action-set pieces are also a good way of establishing setting and throwing out exposition that would normally be handled as a codec-conversation in lesser games. Throw in some especially good meta-story elements such as the recaps, the Twilight Zone-esque television show, the radio station heard at ungodly hours and the Voiced over narration of the main character and you have a game that takes advantage of every given venue available to tell a good story.
Plus, unlike a lot of Stephen King novels, Twin Peaks, and Lost; Alan Wake actually progresses it's core story at a breakneck pace that keeps you hooked, even if you find yourself wincing at a few bad lines of dialog, or witness one bizarre plot twist too many. Ultimately the story, while not particularly amazing in its own right, is presented in such a way as to fully utilize the other elements of the game which does help make the whole of the game a very good game. I would even go so far as to say that the story helps make the gameplay more fun, adding an emotional reason to invest in the action that you imbibe. If the story in Wake had been a clusterfuck and had it not utilized the interesting narrative tools that it did I would be singing a very different tune.