The way I see it -
There are really two schools of thought on the subject of Death Penalties in MMORPGs.
The first - Negative Reinforcement:
You punish people for doing things bad. Death penalties, XP loss, all kinds of the more "old school" type of systems MMOs used to quite frequently have.
The second school of thought - Positive Reinforcement:
You reward people for doing things good. Rewards for staying alive, bonuses for doing something really well or without making mistakes or dying, etc.
Interestingly enough, World of Warcraft is adding an element of Positive Reinforcement to their latest Raid in 3.2 The highest difficulty raid instance will have a "Tribute Run" where the game will keep track of how many times you wipe on the bosses leading up the end boss.
If you wipe a lot, the rewards you earn for killing the end boss, the tribute, will be less. If you never wipe on the first bosses, when you kill the end boss you gain much better loot from the tribute run.
It's rewarding the good versus punishing the bad.
Both really accomplish the same objective, make players care about dying and try to avoid it.
Other games like Chronicles of Spellborn have a Positive Reinforcement system. You don't lose anything when you die, but instead you gain bonuses the longer you stay alive.
Psychologically, the vast majority of humans respond to Positive Reinforcement much better then they do the negative side.
It's all about finding different ways to motivate people. One just does so in a fashion that doesn't punish you or make you feel as bad, but the rewards at the end for accomplishing something are just as sweet...
... if it's done right.