[wyattpeak]

I remember playing through Morrowind. It was my first Elder Scrolls game, and I got entranced by the in-game history books about a character called Jagar Tharn. They were deep and convincing in a way I'd never seen in atmosphere-setting content before, it really felt like I was reading about real events.

Turns out, Jagar Tharn was a major character in an earlier game in the series, and the histories more-or-less recounted the plot of that earlier game.

I think you're right that that referencing of earlier stories really carries a lot of weight, but I don't think the player even has to be familiar with those stories to profit from them. The very fact that they are "real" stories and places that exist outside of that game I think allows the designers to treat them more convincingly, more engagingly.