Demonstration of bad dialogue trees
This week's Zero Punctuation on Dark cleverly shows how bad some dialogue trees are (starting from 02:19) by treating options like hyperlinks rather than what the player's character would respond with.
http://www.escapistmagazine.com/videos/view/zero-punctuation/7823-Dark
http://www.escapistmagazine.com/videos/view/zero-punctuation/7823-Dark
Comments
I bring up Ultima 7's dialogue system because, based at least on that one video linked-to above, it seems similar to what is being described -- and yet I seem to recall that I liked the system in Ultima 7. It was quick, simple and elegant; perhaps not suited to a full adventure game focussing on character interaction, but apt to the gameplay in which it was set.
On the other end of the spectrum is the dialogue disc system in Mass Effect or Dragon Age 2, where you only select tone or general intent, and have the characters deliver a scripted convo based on that. At this point, I think that's the best fusion of the two ideals, although lacking in challenge from a conversations-as-puzzle-mechanic point of view.
Ideally you'd construct a convo yourself via such an interface and have a dialogue/speech synthesizer fill in the blanks and deliver it, or just use speech recognition, but that ain't happenin' no time soon.
For a character like the Avatar, I'm inclined to like the idea of leaving out the main character's speech entirely: the idea is to allow the player to project whatever character they want onto him.
For a work that includes a fleshed-out main character, then perhaps indeed what you describe from Mass Effect (which I'll confess that I haven't played, although I've seen screenshots of the dialogue interface, I believe) is a good idea.
As to constructing dialogue yourself, have you seen this video from Richard Garriott's Shroud of the Avatar? It's difficult to say quite how impressive it really is, but it looks rather well-done to me.