Returning to Smash's storyline, if it is a child's imagination, do they hate themselves? Seeing as the "Trophies" end up killing the child's exploding, laser-shooting, missile-launching hand.
I'd say the story takes place in an insane asylum.
It's not any fun when the toys always win.
That's why he has lasers.
If it were to be said that the toys were possessed by evil/good/noobish spirits and the world was inhabited by white-glove-wearing hands, then that would make complete sense. Otherwise, why would a kid let the toys win in the first place? Little kids don't like losing.