Playing a Character in a Familiar Setting (But Shorter)

I wrote a post about this topic already but I never felt like it was very successful. So, this is a second attempt at it:

Imagine I’m going to run a game for you (I’m the GM, you play a character). I tell you it’s like Twin Peaks, but the FBI never shows up. No one is coming to rescue the town from Bob and the Black Lodge. You play people from the town, and you have to solve these problems for yourself.

This means your character knows all the NPCs. Your character knows all the locations in town. So they’ve already been everywhere and met everyone, before the game even starts.

How are you going to role-play that? Let’s list the possibilities:

1. I tell you everything about your character and your character’s relationships with all the NPCs. You have to ask me about every detail of the setting before you say or do anything in-character. Hell, I might as well just write you lines, this is basically a play or something isn’t it.

2. I provide you with a document describing all the NPCs and all the locations in town, and you create a character that somehow fits into this matrix. You still need to memorize all the details in this document, or you’ll get stuff wrong and your character will seem like an idiot. This sounds like a pain in the ass to me. Also, like the first possibility, it means I have to invent this entire town on my own before the game starts, and that also sounds like a pain in the ass (especially if the players don’t care that much about it, but that’s a matter of player investment, and my point is that this is a matter that concerns your technique, not your attitude).

3. You tell me who your character is and who they know and where they hang out, and you invent those people and places yourself. If I want to invent a character, I’ll tell you what they’re like and ask you what your character’s relationship with them is. If I want to invent a location, I’ll tell you what it’s like and you tell me what your character’s history with it is. I’ll portray these characters and location in play, but I’ll honour whatever you say your character’s history with them is. The only time I make up something and ignore your input is when your character encounters something new, that they’ve never encountered before.

I think it’s pretty obvious which one is going to work best for everybody. The easiest way to play a character in a familiar setting is just to invent any part of your character's life history that is relevant, be confident about your statements, and let the GM portray them in the game.

And yet, the difference between inventing or introducing an element into the fiction and actually portraying it isn’t a difference that most rpgs ever really address. It seems like designers just take it for granted that you'll just do it the same way they do it.