In the "real world" humans are actually gods, and paradise has gotten boring because there is no challenge. Essentially the real world is experiencing "The WoW Effect" where perfection and ease has left them pining for the days of hardcore. So the "immortal god humans" from the real world sign waivers and intentionally put themselves into the ultimate hardcore video game: Earth. This is one version of Earth but there are many with varying degrees of hardcore rules (That's why the population is smaller in the past, it's actually more hardcore.)
However, in order to make the risk feel real and give the mechanics impact, your memories need to be suppressed, because if you knew of the actual limited consequence of the world, it would affect how you act and it would transform big, impactful things within the world into trivialities.
So in short. We really live in a world more like WoW, where everything is awesome, but we hook in the EQ-Earth for the nostalgia of when life was tough; and it's super popular, billions play!