Anything where you break the spec can cause problems!
You can see from your screenshot there that the disc you're going to create might not be readable under DOS/Windows 3.1x etc.
The default options are within spec and so are guaranteed (*) to work with all devices.
If you find a program / drive / player / whatever that goes EXACTLY by the book, it'll fail to recognise your disc properly and probably blow up
The ISO9660 file system is very restrictive/basic - but then it dates back years and years!
Things have moved on - so have file systems.
These days you'd use Joliet which supports unicode, long file names etc etc.
Newer still is UDF which supports all the above (only better) and more.
So rather than changing the ISO9660 settings to make them out of spec, just enable the Joliet or UDF file system.
As mentioned before, Windows will always use the best file system available on the media when it comes to displaying stuff to the user.
So even though the ISO9660 file system will contain filenames limited to 8.3 characters (XXXXXXXX.YYY format), you'll never see them. It will show you the nice long ones in the UDF filesystem.