alt Hacker News"inhabited by characters ACTUALLY living in the computer"
It's hard to imagine these feeling like characters from literature and not characters in the form of influencers / social media personalities. Characters in literature are in a highly constrained medium, and only have to do their story once. In a generated world the character needs to be constantly doing "story things". I think Jonathan Blow has an interesting talk on why video games are a bad medium for stories, which might be relevant.
Please share! Computational literature is my main area of research, and constraints are very much in the center of it... I believe that there are effectively two kinds of constraints: in the language of stories themselves, as thing-in-itself, as well as those imposed by the author. In a way, authorship is incredibly repressive: authors impose strict limits on the characters, what they get to do, etc. This is a form of slavery. Characters in traditional plays only get to say exactly what the author wants them to say, when he wants them to say it. Whereas in computational literature, we get to emancipate the characters! This is a far-cry from "prompting," but I believe there are concrete paths forward that would be somewhat familiar (but not necessarily click) for game-dev people.
Now, there's fundamental limits of the medium (as function of computation) but that's a different story.