I have heard time and again that self-insertion is the scourge of fan fiction and that any tale containing traces of it must be bad by definition. I used to believe that, too - for almost half a year.
The thing is that if this were true, virtually all fiction would be condemned from the start. All characters that we write are animated by putting little pieces of ourselves into them. There is no other way to make a character come alive. If we do not invest a little bit of ourselves into them, they will at best be forgettable cardboard comparses. The trick is to use different pieces in differing mixtures, so as to prevent all characters from becoming carbon copies of ourselves.
It's easier with fan fiction, since the characters are defined in their behaviour and relationships already. With new characters it can be a little more tricky to make them unique, because there is no model to guide us. This leads to a common prejudice, namely that any new character introduced in a fanfic must automatically be a self-insertion of the author.
Freud believed that all literature was in its basis self-insertion and all plots were wish-fulfillment. The only difference, according to him, lies in how well the author can mask it and gloss it over with redeeming social values. As a very broad generalization that may not be incorrect.
If all characters are in some small way self-insertions, then what we commonly call self-insertion is only the extreme end of something normal and usually positive in writing. It is not different from "good" writing by nature, but rather by degree. So why does blatant self-insertion get such negative reactions?
The answer is "Mary-Sue-ism". The term comes, I believe, from early Star Trek fiction. To quote Melissa Wilson who wrote the excellent "Mary Sue Litmus Test" and "Dr. Merlin's Guide to Fan Fiction":
You already know Mary Sue. Mary Sue is the perky, bright, helpful sixteen-year-old ensign who beams about the ship. Everyone on the ship likes Mary Sue, because Mary Sue is good at everything. Mary Sue is an engineer, a doctor in training, a good leader, an excellent cook, and is usually a beautiful singer. Mary Sue often has mental powers that may manifest themselves as telepathy, precognition, or magic. If Mary Sue is very young, she is often the offspring of one or two already established characters. If she's a little older, she will probably end up sleeping with the author's favorite character. Her name is often the author's name, be it a net.name, a favored nickname, or the author's middle name (this is seen in the most famous Mary Sue of all time, Wesley Crusher, who was named after Trek creator Eugene Wesley Roddenbery). By the end of the story, Mary Sue will be in bed with the desired character, will have beamed away amid cheers from all the regulars, or will be dead, usually accompanied by heavy mourning from the cast. The reader, on the other hand, will be celebrating.
The female Mary Sue is perky, everybody's darling, never suffers from PMS and is an inspiration to those around her. Her male twin is a brooding, solitary type who has a deep-running disregard for authority that always gets him into trouble, even though he virtually always succeeds in whatever rule-breaking stunts he pulls. In the end he has earned the grudging respect of the authority figures.
He also tends to have horrible guilt trips about things that were neither his fault nor in any way under his control. Everybody around him knows that he doesn't bear any blame, but he insists on torturing himself with second-guessing, angsting the night away. This is a cheap trick to gain a reason for angst, soul-searching and general brooding, without having to commit and let the character be responsible for doing something actually wrong. It's also often used to allow the character to become anti-social and do otherwise despicable deeds, because he is so racked with guilt or hurt. Mary Sues can't do anything remotely bad without heaps and heaps of explanations and excuses.
Some self-insertion authors think they can avoid the accusation of Mary-Sue-ism by letting their characters suffer. Tedious martyrdom, accompanied by slews of self-pity and sympathy from the other characters is often the result. Readers get turned off by this just as by the tedious wish-fulfillment because both are one and the same. The whole "suffering" thing is nothing but the good old "one day when I'm dead you'll all be sorry you were so mean to me" fantasy.
Other common defenses against accusations of Mary-Sue-ism are, "This character isn't me - she just looks like me, talks like me, has my name and does all the things I'd like to do," or "My character isn't an idealized avatar - he's got tons of character flaws," or "She isn't perfect - there's lots of things she can't do." Unfortunately the "character flaws" are usually something like "he cares too deeply about his friends" or "he always tries to give his best in everything he does, to the point of overexposure". And the "lots of things she can't do" usually include the fact that she can't play banjo to save her life and other skills that are completely irrelevant to the story.
The problem with blatant self-insertion is that in many cases the author uses it because he or she does simply not have the skill to do anything else. And an author who does not have the imagination to create a character other than a copy of themselves (slightly idealized, of course) will most probably fall into the trap of Mary-Sue-ism, too. It is not that self-insertion is the cause of bad writing, but that both have one possible cause in common.
This also means that an author who knows what he or she is doing can pull off blatant self-insertion without writing a bad story. I have read several highly enjoyable self-insertion tales that were as blatant as all get out but managed to avoid the most annoying Mary-Sue-isms.
The author of a Mary Sue Adventure operates on the simple principle of wanting to be liked, thus he or she makes their character likable. All the regular characters want to be friends with her or him and the author expects the readers to feel the same. Unfortunately that runs against the readers' fundamental wishes. The readers don't want a character they can like, they want a character they can identify with. The reason why Mary-Sue-ism is so annoying to everyone is because nobody enjoys seeing someone elses wishes come true. The most successful stories are those where the reader can put him- or herself into the role of the protagonist - but Mary Sues are designed to have nobody in them but the author, to be watched and admired from "outside" as it were.
As a side effect, a Mary Sue tends to take the center stage away from the regular characters. Within seconds of Mary's appearance everybody around her has joined her supporting cast. The other characters' lives are shown only in as far as it involves Mary and no character development takes place without her being connected to it in some way. The main characters may vanish into the background completely, except for some of them that the author took a liking to - those are allowed to become close personal friends (or lovers) of the Mary Sue. A story like that does not deserve the term fan fiction any more.
Again, this can work perfectly all right in a self-insertion story, as long as the author has the integrity of admitting the fact and allows the regulars to continue living their own lives, separate from their roles in the self-insertion story. Nobody wants to read a fanfic to see their heroes play second fiddle to a Mary Sue - but they might not be so set against extended cameos that do not diminish the regular characters' status.
In short, self-insertion is not the scourge of fan fiction. It can be just as entertaining as any other type of story - provided that the author knows what he or she is doing and knows how to avoid Mary-Sue-ism in its many forms. Mary-Sue-ism is not limited to self-insertion any more that self-insertion automatically leads to it, but both have the tendency to go hand in hand if care isn't taken to prevent this.
I'll give you a few of my personal recommendations. I won't go too much in depth with these. There are a lot of other essays like this that have far more complete lists of Mary-Sue-isms and how to avoid them, so I'll restrict myself to the ones that I find the most annoying and those that I think refer to the relationship between self-insertion and Mary-Sue-ism.
My personal recommendations are this: Be honest. If it is a character that represents you and gets all your wishes fulfilled - admit it. Don't waste any energy on covering it up. Instead use that energy on finding ways to make the tale interesting to others. Tell it in a way that hasn't been done before. The readers should be able to identify with the character and slip inside him or her. That way they will enjoy the wish-fulfillment, instead of just watching it.
Another part of honesty in self insertion is that if the character has all his or her wishes fulfilled, they should enjoy it. Letting them fret or angst over it sounds dishonest and unnatural, which distances the reader from the character. There may be downsides to the granted wishes that become apparent later, but nobody real would see them right away when there are still upsides to be dazzled by. With great power may come great responsibility, but until it arrives, any normal human being would be going, "Yaay! Great Power! Wheeee!"
Do not - do not - for a second believe that you can afford Mary-Sue-ism if you just "offset" it with enough drama, character development or angst. You cannot offset Mary-Sue-ism. It only becomes more obvious and annoying by contrast. Besides, half of the things that are supposed to counteract the Mary-Sue-ism turn out to be the same thing in disguise.
In particular don't use the false guilt described above. If you want your character to have a guilty conscience or a troubled soul, then have the integrity of letting them do something wrong, letting them be truly responsible for something bad. If you cannot bear the thought of letting your character do anything like that, then don't bother us with false lamentations.
When you create a new character - whether it is a self-insertion or not - think for a while about the interplay between character and story. Do you need this particular character to make the story work, or are you writing the story around the character as a vehicle for him or her? In the latter case, try to come up with an explanation why this character deserves to be showcased like this. If the answer is "because s/he is so neat that people should like to read about him/her", then chances are you've got a Mary Sue on your hands. Basing a story solely on a character to drive it is a very hard thing to pull off and should best be left to experienced professionals.
Finally, how well do you take criticism of your character? If you find yourself reacting to attacks on your character - including the allegiation that he or she might be a Mary Sue - as if they were personal attacks on you, that should tip you off that you identify with this character rather strongly. Perhaps too strongly to judge objectively about his or her actions and role in your story.
Back to my Ranma ½ page.