[snip]
There is a certain part of dialog that is called immersion. Simplistic answers make me believe that if a 1000 folks journeyed on the same path as you, 50% would end up in the same destination so your accomplishment in the game world really isn't spectacular at all. Just happen to be the guy they are talking to. In Morrowind, the large body of info in any conversation made me feel like just a guy asking questions, not "The Savior of the Universe" from square one.
In response, I'd lean more towards 1 than 2, and just don't like 3.
I did get the same feeling in Morrowind. As you start out, it makes you feel disoriented and a perfect nobody in a new land, which is what you are in the game anyway. Yes, the system is a bit "cold" and often dumps massive lengths of text onto the player. It's aesthetically shit, and a bit immersion-breaking (as you literally have to stop "playing" in order to read the lengthy texts, sometimes it felt like browsing wiki and going on a link-clicking rampage), but I still do find it a great system. I quite like the keywords navigation, and the fact that, like in real life, you can as someone about "other" topics, and not just the ones that that character was supposed to talk to you about.
Alternatively, I also prefer a PST/IE/D:OS dialogue system (also found in classic adventure games), which is, as a concept, just in form of a list rather than a wheel. Yet there are two main issues which lead me not to like "the wheel" at all, not in "decent" RPGs.
1.Visual/spacial limitation to the number of options. Even at higher resolutions, it's just not visually viable to put too many options on the wheel, nor to fully write them.
2.Mismatching between the wheel options and what the character will actually say. Because of reason .1, it's natural that the options on the wheel are "symbolized" by a word or short sentence, as the full sentence wouldn't fit on the screen, and yet there is often some dissonance between the tl;dr and the actual spoken/written full line.
The wheel isn't evil per se, it's an ok visual choice that just does the same exact job as a numbered, or not-numbered, list: yet these "limitations" make make it the worst possible choice for dialogue/writing/story driven games, whereas it works great for popamoley shit. It's something I really disliked in TW2 as well, because it often "forced" the player through the story, rather than narrating the story to the player: dialogue in TW2 really felt like "press A on your remote if you want Geralt to go right, B for left" or "Red button for ending one, Blue button for ending two". The same, identical outcome and choices could have been delivered through a much better (and complex) system.
The ultimate choice also depends on the kind of game, I guess. For example, the Morrowind-styled dialogue would have been meh within the Skyrim UI, and the game would have benefit from a "PST"-like system, rather than the "flat wheel" it came with, which limited, rather than then number of dialogue choices, the actual length of each reply. But, Skyrim also would have benefit from the big info and lore that the Morrowind-style is capable of conveying. Or, this could have been "moved" to an easily browsable log/diary item (an actually in-game item, like the books, that the character would pull out of their backpack and start reading), rather than a submenu entry.