It is meant to give a quick and dirty estimation, nothing more. Players should be thinking about roleplaying their characters with the above rules serving as feedback, not as a method for optimizing their reactions. NPC rections will have to be determined freely by the GM, anyway. As soon as you feel able to, drop the system entirely. The simplest method I've seen to handle Fudge sanity is to treat it in exactly the same manner as physical damage.
Sanity becomes an Attribute, just like Damage Capacity.
When a character suffers a Sanity wound, the player and GM can decide exactly what the appropriate problem is. Used properly, it can give a more three-dimensional representation of the character's sanity. It's more work, but I found it worthwhile. Here is something I posted many moons ago. I've never tested it, but it ought to work well in theory.