Why not both?
Toady has talked about writing yourself into the world (i think), maybe through multiple choices like Adom. He's also mentioned starting people off as established characters in interesting moments.
We already pick the personality of our characters when we create them, so allowing us to pick who we are and then binding us to what we choose is basically the same as forcing a character on the player, which the devs are apparently against. This is however a major problem when it comes to the whole matter of us pretending to be people that we are not. Once that's in the situation occurs where, since we are able to be whoever we want to be it does not make sense to actually pretend to be someone when we can simply actually become that person and then become somebody else. If we can behave as anyone we like, then who we are at the moment is a cynical matter of strategy; why pretend to be something when you can at the press of a button actually become the thing that we would otherwise be pretending to be?
It is actually a similar problem to the 'become a hated ruler and then have him commit suicide' problem, which is why we are forbidden from becoming existing historical characters. The solution I think is actually to restrict what the player can do, not by outright stopping them doing it but by forcing the player to risk potentially revealing their true identity as a possessing spirit. If you keep making people doing stuff they would not do, they will conclude at some point that they are in fact possessed by an evil spirit and then we can get 'exorcised'. If we force people to do things that are REALLY out of character then we might sometimes simply lose the character then and there.
The thing is that if you lose control of a character then the character goes an blabs about your existence. The more aware everyone becomes of your existence, an idea which is spread like other ideas the more easily you can get cast out by those you possess. Eventually certain places become warded against you, so it becomes impossible to assume the identity of anyone in said places.