If happiness/mental stability/morale gets reworked, I'd like to see something like the system for wounds. That is, instead of one number that indicates how wounded or not-wounded you are (such as lesser games might have), track several aspects of emotional health and allow each one to be injured or healed by events. For example, "Aesthetics" would be hurt by living in an ugly environment, encountering vermin, producing shoddy goods, etc., and helped by seeing things of beauty. "Security": hurt by being attacked or seeing friends get attacked, helped by killing or wounding an enemy, seeing a Fortress Guard on patrol, seeing well-made doors, traps, and arms, etc. Other categories could include Comfort, Friendship, and Work.
For most of these, there could be a "failsafe" behavior that would trigger when the accumulated injuries reached a certain level. (Security: Acquire a set of armor if you can, and then go to the barracks and spar with the soldiers. Comfort: Drink a lot of really good booze in the best dining room you can find. Aesthetics: Go walking in a statue garden or legendary meeting hall. Friendship: Hold an impromptu party with your family and friends.) This would be disruptive (like being On Break, you can't cancel it and it takes the dwarf off work for a while) but would rapidly heal much of the damage.
If that's not enough (personality traits would influence the exact limits), the dwarf has some kind of freak-out. For example, a guy who loses three masterworks in a row might blow right past the failsafe and go into an Aesthetics-fueled rage. The cause of the injuries would be tracked, so he can direct his wrath at the people who broke his stuff if they're available.