Failure should be a possible outcome of decissions and not all (but maybe some) outcomes result in game over. As said in the video (not sure if this one or another one of him) he said that something that would fail definitely in the real world should also fail in the game. The most simple example is if your lv1 char meets some lv99 guards and tells them "Run or I cut you to pieces (attack)" and he ends up as a pile of meat on the next wall.
In another discussion (at obsidian? I am not sure) somebody gives an example. There is a game and somewhen near the beginning somebody asks you to meet him alone in a dark alley. If you go there you will be attacked by some strong thugs and you will most likely die. Many people complained about that because they expected a quest. the devs answered: "If you cannot fight well and you follow a stranger into a dark alley alone you are an idiot and deserve to be killed. The game works as intended." I do not remember what game it was and I did not play it.
I dislike that you cannot fail the main quest and that people drop a note when you kill them. This feels unrealistic (Oh no, I use the bad R word (realistic) again). When you kill somebody who is significant for the main story or if you make things that go extremely against your main goal (genocide of several towns would be one idea, your rep is so bad that nobody wants to deal with you), then you should fail the main quest. The question is how you deliver this to the player. Two obvious choices would be the Morrowind style or the game over screen (both not so good). The best way is to stick to choice and consequence.
In case of D:OS2 this would mean, if you do things that are obviously bad for your primary goal the inquisitor will rule the world and he will purge everybody including you. In case of D:OS1 if you kill the weaver of time (was this her name?) than the void dragon will destroy the universe.
Prof. Dr. Dr. Mad S. Tist
World leading expert of artificial stupidity. Because there are too many people who work on artificial intelligence already