OK, after watching the gameplay video, I think option 2 is correct ("shuffled into the deck"). This is because in the video, the second donsol reappears in the next room right after it was escaped in the previous - this would not have been possible in option 1.
Oh that's quite interesting.
When I play with physical cards, I just shuffle them and put them at the bottom of the deck. But the game puts them in the deck and shuffles the deck. I can't quite tell what's the better option for the narrative aspect of the game. Shuffling the deck means that the monsters move to a different room, shuffling the remains of the room and putting it under deck means that you eventually return to that room.
As you say, in terms of 'narrative', having to face monsters you run away from- at the end, as if by 'returning' to those rooms makes sense. However from a balance point of view shuffling them into the rest if the deck seems like a better option. I've done this in my own version as it's easier to code, heh. Also I prefer the risk/reward of running away a from a Donsol, not knowing that it might crop up in the next room anyway - but hopefully with a new shield!
I agree that gameplay-wise shuffling into the deck is better. Otherwise, becoming good at the game means having to memorise the positions of all the cards you have escaped! I'm not sure I find that fun :D
From a narrative point of view, I don't find it a problem - you could say that monsters are roaming. In any case, 'put at bottom of deck' doesn't ensure you get the same rooms, since you don't always escape a full room. So the current narrative of "returning to the same room" is sort of broken already.