It's a training exercise and it works the exact same way all training for anything works.

• Studying doesn't have the same stress as an actual exam, but it still works
• Training for a sport isn't the same as being in an actual match, but it still works to learn the strategy and teamwork etc.
• ...

Military exercises are the same.

In a realistic scenario you would expect an attack to come. At least that there is a chance of the attack coming. Of course there are different types of military exercises. But a lot of them take place over a longer period of time and the enemy can attack at any point. A good strategy for the exercise is to avoid attacking at the start of the exercise to allow the defenders to settle into their positions a bit. The exercises also tend to include multiple potential attack vectors, either multiple objects being protected or that the attacks can come from multiple angles. The defenders will therefore not know if their position will be attacked at all. Again a common tactic is to initiate an attack on one vector hoping the defenders will redeploy to this area only to have the main attack come in at another vector. The defenders do not know which is which.

As for the fear of life this is somewhat of an issue. Obviously you can not go around killing people for military exercises. But you can make them lose face. The exercises will have referees who will look at an engagement and tell you the outcome. The exercises is more about movements, tactics and logistics rather then shooting skills. So you can let the soldiers fire a few blanks at each other and then go tell them who won. If a referee is not present the soldiers and commanders will do a fair assesment of the engagement for themselves. Getting "killed" in such a way is a bit of an embaresment that you want to avoid and the next time you will do better.

That being said you want soldiers to be fearless in battle and sacrifice everything for a victory, even their own lives. In fact soldiers tend to be more motivated by war then by exercises. So the problem is not that solders do not fear death in an exercise but that they fear having to go through all the pain of battle without actually winning anything important. Are you willing to march for days in heavy rain and mud carrying heavy gear and eating cold meals only for a general to tell your batallion you did a good job? Are you willing to go thorugh all that in order to defend your country from foreign invaders even though it means you might be killed at the end of it?

How can you train for anything then? How do people play for any sports when training is not for real?

You need to learn how to handle your equipment, cooperate with others, and what tactics you should use. You need to learn that before real combat because if you do not know how to do it when you are not afraid you will for certain not know that when you are afraid.

If you do something it is second nature to you then you have a better chance to do it if you are afraid because you do not need to think about that. If you have learned to drive a car compared to how it was the first time you were in it compared to when you know how to drive. If you were in a car chase or another high-stress situation would you be better now than when you started to drive? The answer is you are better when you can use the equipment without thinking about it and the reduced amount of thinking you can do can be for the larger stuff like where should you turn not thinking about how to apply the gas, break, and turn the steering wheels.

Military war games are primarily what you call large-scale exercises they can be just on paper or with just communication between units commander and not everyone out on the fire, The can be with everyone out there too. It is not what individuals do in combat that is the most important but coordination and movement and cooperation between units.

How do you handle moments of there is a limited number of roads? How you maintain vehicles in the field, will break down even in training. How do you make sure units get fuel, ammunition, and anything else you need? Is the communication system working and a forward observer can get artillery support?

How do you coordinate so multiple units attack at the same time and maneuver to support each other?

Making sure everything that is not just individual soldiers fighting is extremely important. If your tanks do not get the fuel they quiclty end up as stationary metal boxes that do not have any electrical power and the only way to fire the gun is to manually crank it around. The ballistic computer and thermal sight will no longer work. The practical effect of a tank with no fuel is as if the tank was not there or destroyed.

It is a cooperation between units and logistics that you train in war games not primarily how individual soldiers do the fighting, that is something they should already know.

When you train troops both on the small and large scale you can use https://en.wikipedia.org/wiki/Multiple_integrated_laser_engagement_system or a similar system to simulate compart by fire lasers that vests on individual soldiers or system on vehicles detect. So you can get "killed" and it out of the fight temporarily.

People like to win and fake combat like that will be stressful even if you are not risking your life. Play paintball, Laser tag, or something similar and you will notice stress and the will not to be hit even if it is all just a game.

If you and your fellow soldiers can do what you should do first with no opponent and then with an opponent that does not kill you for real but take you out of the fight you have a lot better chance of doing that for real compared if you did not training.

When i was in the Finnish military for my mandatory service. It was taught to us like repetition. So when you can do something when you're a sleep from top of your head you can do it under heavy stress. So training is just for repetition to make you do things automatically.

Military war games often don't involve actual combat, instead being either computer simulations or tabletop exercises intended to test out hypothetical scenarios with something similar to the d20 system being used to determine outcomes. While it may be hard to believe, these kinds of exercises can produce valuable insight into what might happen during a conflict, and some countries have paid a steep price for ignoring the outcome of a tabletop war game.

One of the most famous examples of this was in the Pacific theater during World War 2. Shortly before the Japanese launched their attack on Midway, their military leaders held a tabletop war game where they did a test run of their attack plan. The outcome of the exercise was a decisive American victory. The Japanese naval leadership dismissed the results as implausible and proceeded with their plan, only for the events predicted by the war game to play out in real life.

I'm not sure if I understand your question correctly.
Do you want to know why training (for anything) works?
That's pretty easy. Simple example: Weapons.
Training how to use them means you can use them in a real battle/war.
That gives you a really good advantage compared to not being able to use a gun.

They're training muscle memory and habits.

Train something a 1000 times and you will be better than if you only trained twice.

Something that I think the other answers miss is that often military exercises aren’t about training, at least not entirely. Often they’re constructed to test out possible, sometimes wacky scenarios and evaluate performance. Such as - China is invading Taiwan and our Pacific fleet just simultaneously sank, what do we do? Can we still win and if so how?

This is why sometimes you get those sensational news articles about how “a fleet of speedboats destroyed a US warship!” and the like, not realizing that it was a fleet of literally dozens of boats against a single ship with no other support that wasn’t allowed to use half its weapons and in unfavorable position to maneuver, and also it was a rookie captain vs a guy who literally specializes in rapid motorboat assaults or whatever. That’s the kind of stuff that gets concocted for exercises.