Before the Matrix went live, there were many early prototype matrix versions that the AIs constructed.

One of the preliminary matrix versions was made to test human reactions to pure archetypes and emotions. The Mister Men/Little Miss world consists of these archetypes (strong, happy, grumpy, silly, etc.) along with a small number of humans.

The humans are real humans, and the AIs are using their responses to calibrate more subtle versions for the final matrix. The humans have been manipulated to have their "this is a dream" brain circuits turned on, which prevents them from seeing how impossible the stories are while they are in them. As this technique was perfected, it allowed AIs to make humans ignore most matrix glitches.

The AIs appear directly on occasion, when some more direct experimentation is necessary. They are the Worms.