The game is bound by min/max issues - choice of race (look at the optimization boards), class mixes served like matinees (splash of this, dash of that, then run through these 4 prestige classes....), and even dump stats. Choice of feats allow for this as well - some chains are deadly, while a role player may chose a collection of feats whose combined might is incapable of pushing through a wet paper bag. Flaws fall into this mix. If you have a munchkin - ya got to watch em, corral their choices into a semblance of reason, and limit books, feats, classes, spells, equipment, etc.... If you trust your group/have few power gamer issues, then the choices are more relaxed/open sourced.
As DM you have to verify all matters (well, the savage species lists the 1/2 ogre as CR... uh, nope - no way) that dip into sourcebooks and alternate rules. These flaws fall into that fine. If you have problems with balance when dealing with a group, then I'd be disinclined to use them, but if I have faith in my group, then I'm open. Same thing for the alternate rules for classes, races, bloodlines, etc. Also, playing monsters from the new (or non-WOTC) monster books - it’s a DMs job to make sure its ok - and the efforts needed are dictated by the maturity of his players. Flaws are fine - as are many options, with a good group. They are, after all, optional rules.
I allow gestalt characters, variant classes, and a beer or two at the table - because the groups I game with make these options viable. Psion - I understand and even agree with your argument to a very limited degree - but I'd use the same attention as a dm to when players express interest in a prestige class as I do to flaws. Your argument against flaws is grounded in their potential for abuse – which is no more then the prior mentioned (and time honored methods), and offers at the other end a tool for giving further twist and detail to a character. I’m less worried about flaws then I am about that latest FR prestige class and spell combo.
As a final note – the xp per incident method has a problem – the man missing an eye gets xp when he reaches for his binoculars? The 1 legged man when he is challenged to a sack race? This method works great for a PC with alcoholism breaking down and drinking while performing watch duty… but it only works for some aspects. That, and a player who plays his alcoholic as struggling with his ‘issue’ too frequently rises up a level faster then folks who do not have ‘issues’ – so this method has a flaw as well.
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