Most of the AR games I have seen look fake or cartoonish. I doubt they will be effective in telling a horror story.
Demon's Souls player invasion scared me more than any other horror movies combined. Sometimes, it's the idea or situation that's frightening. We don't always need the presentation.
And no, I don't want to wear a Playstation Eye (+ cable) on my head. -_-
Clicky dpad, good. PSEye on top of my head, bad.
Yes I know it was crazy but it was the easiest way I could think of to simulate this