I'm actually playing through KOTOR now, since it was just $2.50 on steam, and I never played it when it came out. I played through Mass Effect 1 and 2, and it is easy to see how KOTOR is a precursor to ME. The conversations in Mass Effect are definitely more cinematic, and I can understand and appreciate the design choice of only showing a "teaser" on the dialog choice menu and then having a longer conversation play out. That's fine by me. However, I do not like the Mass Effect system of having paragon choices on top and renegade choices on bottom. I understand why they did it - in a sense, instead of having the player pick precise responses, he or she is just given three options for every choice - be nice, be neutral, be a jerk. It's too easy to be good (or bad). In fact, I was able to complete the endgame sequence without anyone dying just by completing everyone's loyalty mission, choosing the most powerful character for each mission, and then making "good" choices (I think) at every turn.
Most conversations in KOTOR are like this, but occasionally you do get more than three choices and occasionally it's not always clear which is the light side and which is the dark side option. I would actually have liked the game to offer even more ambiguous dialog choices. It's fun to have to think a situation and try to choose between unclear options. It's like in Ultima 4 - some of you may remember that when you entered Skara Brae, there was an NPC who would ask you if you'd reached the summit of spiritual perfection (or something like that). Now, even if you had achieved partial avatarhood in spirituality or even if your were a full eight-part avatar, if you answered yes you'd loose points in humility. Now, you could disagree with Richard Garriot's interpretation of humility or virtue in general, but the conversation made you think. Now, before anyone jumps on me, I'm not saying one option is better or worse in any absolute sense - I'm just saying what I prefer.
If I could make my dream RPG, the conversation system would be somewhere between KOTOR and ME - there would not be a 1-to-1 relationship between what I see in the choice menu and what the character says, but there would be meaningful and ambiguous choices.
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