An unremarkable quirk of an individual may be exaggerated so that in its exaggerated form it is a violation of norms of personal behavior or appearance. In this way, exaggeration has a role in construction of humorous situations, by generating violations of the moral order.
Ridicule, that is, joking or laughter at the expense of some group or individual, imputes the responsibility for some moral violation to that group or individual, and damages their social status both in their own minds and in the minds of others. Suppose that, say, J. Doe thinks of the laughers in some situation, ``They're laughing at me.'' For J. to be hurt by this thought requires that J. takes seriously the opinions of the laughers, and that the perceived reason for their laughter is a violation for which J. is himself responsible, whether it is something he has done or something that he is. That is, J. is implied to be responsible for a violation, or in other words, has done something wrong, or is something wrong (i.e., J. is stupid, clumsy, unattractive, etc.). This implied judgment of J.'s moral status, when J. cares about the opinions of the judges (here, those who are laughing at him), can of course be quite painful to J. In this way, jokes can be hurtful to individuals, as well as damaging to their reputations.
It would appear to be a counterexample for the theory that people sometimes laugh when embarrassed, because it was argued above that embarrassment requires emotional involvement in the violation in the situation, which precludes a simultaneous view of the situation as normal; this was said to be the reason that embarrassing situations are not experienced as funny. Why then do people laugh in embarrassing situations?
Embarrassment occurs in situations in which the violator initially doesn't understand that there is a violation being committed. Only when they begin to perceive it does embarrassment occur. But in that moment, the violator's view that they were doing nothing wrong is juxtaposed in their mind with the view that perhaps something really is wrong, and at this moment laughter occurs. Later, when the violation strikes home, the laughter goes away. The point made above that truly embarrassing situations are not funny holds true only after this initial time of confusion passes and the magnitude and reality of the violation is felt clearly.
Laughter can also be a strategic mechanism to minimize embarrassment. A person who laughs at something embarrassing that is happening to them projects to others a self that views the situation as normal or non-threatening. Such a demonstration, if convincing, could either lead others to think that nothing was really wrong, or alternatively that the laugher was quite insensitive to the very real violation - the latter being more likely, in my experience. Similarly, nervous laughter can be seen as an attempt to defuse a threatening situation by attempting, if uncertainly, to show one's emotional evaluation of the situation as being normal and unthreatening.
In both these cases, laughter symbolizes a lesser degree of attachment to the principles being violated in the situation; thus, these cases provide additional confirmation of Prediction 1 above.