Alright, sir, I'm going to take a crack at this.
As has been noted previously, Sheogorath is on his best behavior in Shivering Isles, just as he was in Oblivion, Morrowind, and Daggerfall. That's what makes him so dangerous, he presents himself as a friendly, if eccentric, old man, in order to lure his victims into madness. As you're his champion, he stays in the light and cheery aspect of insanity (being the Prince of madness, I'm assuming that he can choose which aspect of it he presents, if any). But listen to him when he talks to the remaining duke after the Ritual of Accession. http://www.youtube.com/watch?v=l2idjrcNAJU Even mid-sentence, his tone changes and he's suddenly not light or fun anymore. Some less-memorable quotes from Shivering Isles, for those who don't feel like watching the above video:
"Guards, I think Thadon/Syl has forgotten how to use the door. Kindly show him/her out. Before I forget myself."
"Hold your tongue, little Duke/Duchess, or I'll tear it from your mouth."
"Then go, Thadon. Have your Greenmote. Take a bath. But leave. Before I decorate my throne with your insides."
"Then go, Syl. Return to your quarters. Before I send you back in pieces."
This is before he gets lucid, as these lines directly follow him blathering about filling a pit with clowns. But hearing him present the lines, it's obvious this isn't "Haha, look how wacky he is! All talking about murder and cheese!" This is Sheogorath making it abundantly clear what happens to those who cross him. It's increasingly obvious as the player goes through the quest that what he's seen thus far is what Sheogorath has allowed him to see in order to gain his loyalty. But behind the scenes...