A plothole you could drive the Hong Kong Cavaliers tourbus through

That's why he hooked up that thing to his tongue, thats when he completely switched.

From what I recall from the novelization, which I haven't read recently, Whorfin's mental state is REALLY unstable, because of a combination of factors: the presence of two personalities within one brain, the interface between human and Lectroid biologies and psychologies, and the fact that he was, by both human and Lectroid standards, a full-on psychopathic monster even before he was overthrown and sent into the Eighth Dimension. That, combined with the aging of his human host body (which seems to have been slowed greatly but most likely not entirely) and the heavy dose of drugs he's fed at the institute, make for one strange, strange individual.

I guess the main reason that Lizardo/Whorfin "chose" to remain institutionalized for decades, beyond his own insanity, is that Emilio Lizardo was just too high profile a person to remain at large for an extended period of time. Too recognizable and too dangerous to the authorities. (Sort of like if Albert Einstein started robbing banks or blowing up churches.) So after he was captured he probably decided he'd let the humans keep him locked up for a bit while John Bigbooté and the others established Yoyodyne (using the money Whorfin had accumulated during his brief but highly successful criminal career as seed money), and during this time he presumably slipped further into insanity. I would guess he slipped into long periods of catatonia over the years too. When Whorfin sees Banzai's successful invention on TV, that seems to snap him back to a semblance of lucidity (well...for him, anyway) and he breaks out.

As for why the Lectroids don't bother freeing him, the novelization goes into more detail about John Bigbooté, Whorfin's chief lieutenant and the CEO of Yoyodyne. By the time of the movie Bigbooté had been living as a very successful human captain of industry and had to a great extent "gone native." He'd hobnobbed with senators and indulged in human vices, even taking to bathing regularly, something that most Red Lectroids considered a sign of weakness, and he'd decided that Whorfin's obsession with returning to Planet 10 was a waste of time. He was happier building up his power base on Earth. Bigbooté's plan was to eventually formally challenge John Whorfin for leadership, kill him and eat his brains, in accordance with Lectroid ritual. I assume he could never work up the nerve to go through with it, because Whorfin had been sort of a father figure for him back on Planet 10. So he just bided his time, keeping the Lectroids working on the spaceship and overthruster but without his heart really in it, keeping Whorfin "on ice" in the asylum until he decided to make his move.

And that's probably far more detail than anyone wanted to hear about the question, but I love this movie precisely because you can obsess about the backstory like this. heh.