First off: I didn't thoroughly read the whole thread. Maybe some things I say have already been pointed out/discussed. Sorry for that.
I for one do like Costin's idea of having only one (hard) difficulty and giving a cinematic mode to all those who don't want a challenge.
Let me tell you why:
I have been playing many modern FPS and TPS (Third Person Shooters) lately and found them all to be lacking something apart from the fact that those games are stupidly linear nowadays. Then I stumbled upon an older game: Metroid Prime for the Gamecube. I started playing it and immediately died twice in the training level. — Guess what? It felt great, relieving. A real challenge to rise up to.
I mean, I really miss this feature from older games, when after you finally beat the bossfight you've been dying in several times you lean back, mop the sweat from your brow and get to watch the following cinematics feeling like you really accomplished something here. It was hard, insanely hard but you got through. Fuck yeah!
There is no better feeling in gaming 'sides this feeling of accomplishment.
But how do you generate a real challenge in a game like TW?
You can only make the fights harder (or make some clues/keys for some quests harder to find, but then this difficulty cannot be repeated, except with changing locations of those things).
But when you go the 'many difficulties' way the only way to make fights harder is by giving the enemies more health. This makes the gameplay just stupidly hard. It just feels ridiculous to have enemies (that should lorewise be weaker than you) take many hits from you and in return tear you health to pieces. Seriously...
To make combat really feel challenging you'd have to make the AI smarter. But this feature often cannot be simply turned off without coding the AI twice (once in 'stupid' and thus easy mode and the second time for the challenge). And the literally 'dumbed down' AI would have to be handled with real care or else it will be like the ridiculous sneak feature in Skyrim with the enemies' IQ below room temperature.
That's why I support Costin's idea of having only one difficulty and adding a cinematic (or guided play) mode for all those who don't want the challenge.
There you can have the player character be controlled by the AI in the fights (giving it a fair chance against the other AI) and giving the player the ability to give instructions, weapons, armor and potions to the AI (like you could order your team around in DA:O).
And for the easiest mode that can even be played by a wooden spoon you could still lower the enemies' health so they die after every hit, for all I care.