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I think we have to take this as motivation for war with the aliens, rather than giving into or ignoring their demands. Assume that the torturers try this sort of thing with more than one set of victims. If any of the victims successfully defeats the torturers, that spares the would-be subsequent victims from the dilemma. Assume that there are multiple species of aliens that would try this torture technique, and some will concoct more persuasive versions of their threat. If none are stopped, we receive a series of alien torture threats that continues until we run into one with a threat so horrible we decide to kill ourselves. So we need to stop them, to the best of our ability, because we need other threatened aliens to try to stop the torturers they encounter, so the torturers who would successfully threaten us into extinction get killed off before they encounter us.

I think a lot of fantasy tropes have a great deal of merit from a fun-theory standpoint. You are right that being magically transported to a world of magic and dragons would lose its novelty after six months for most people, but the novelty is not the only improvement. Dragons provide a greater challenge to kill than lions (not that fights to the death with lions are currently all that available) so if someone's idea of fun is hunting lions with a spear, dragons ensure they have something to do after they get too skillful. Floating rocks and twisting crystal spires can be harder to climb than any earthly mountain, so someone who has gotten too good at climbing will continue to have challenges. Fantasy ideas are a great place to find things to do after earthly challenges lose interest.

Magic is typically portrayed as something like science, but with rules that are more complex and less difficult to grasp. The rules of magic also tend to follow more anthropic patterns than the rules of science. A scientist, no matter how guileful, will never trick an electron: electrons have no brains to trick. Nothing stops the rules of magic from allowing a wizard to pull a fast one on a thaum. Humans like solving patterns and learning about the world: a more complex set of rules gives more patterns to solve, less difficult rules give more immediate gratification. Rules that behave somewhat like humans instead of like simple mathematical constructs are rewarding because we enjoy using the parts of our brain designed to reason about other humans. And the end result - a spell where you wave your hands around and say some funny words and get light, is far more immediately gratifying than the effort it would take to build a light bulb circuit from scratch (presuming the effort to figure out how to do it for the first time is equal for both science and magic). The whole concept of magic reads like a fairly well-conceived expression of how science would work if it was designed to provide maximum enjoyment to humans.

My baseline virtual-reality utopia is everyone living in small tribes in a fantasy world, where you have to hunt for your food but it's not that hard unless you want something really tasty, where everyone occasionally has to band together to fend off lions or dragons, scientists test the laws of the universe by building supercoliders using magic, and where dying is painful but temporary. I would hope we can come up with better, but it's better than a volcano fortress full of cat girls.