Don't nitpick.

If NPCs can be dynamically fleshed out using LLMs, why not.

Sorry for the essay, but your "why not" got me thinking. I would argue it shouldn't be done, both for gameplay and safety reasons.

The application I see of this is something like city population in RPGs. Looks at Skyrim. Canonically, the cities of Skyrim were supposed to have populations in the thousands. But that wasn't possible to develop with realistic resources, and instead, they hand crafted a large, but still reasonable, number of NPCs to populate each town. It was enough to make the place feel like a functional city, but the cities themselves were physically small enough to make it all work. And, of course, like any RPG, after awhile you max out the dialogue tree of any NPC. This does cause you to lose the immersion.

So you might be tempted, "let's use generative AI to populate a truly vast metropolis. Let's build cities with thousands of NPCs."

You could try it, but it's already been tried. It's called Starfield. I have a weird relationship to that game. I find the plot vapid and empty. And there is no joy in exploration. There are innumerable planets, but each of them is filled with procedurally generated assets. Every planet is vast, fully and utterly empty at the same time. There's tons of bases, landmarks, flora and fauna to explore, but they're all repeats of the same thing, nothing like the vast yet still handcrafted worlds of Skyrim and Oblivion. There's some variety, but after playing for awhile, you see beyond the veil and the patterns become obvious. At that point, exploration loses all joy. I have a complicated relationship to Starfield mostly because despite hating much of it, I still have around 200 hours in it. Though that was mostly because I'm a sucker for factory games and got really into the base builder. The base builder, notably, doesn't rely on those procedurally assets for its core functioning. The parts I like best about Starfield were the handmade parts.

It's tempting to use LLMS to populate a vast RPG world. But soon enough, you will see behind the veil. Sure, they won't repeat the same catch phrases, but after awhile all the NPCs will start sounding the same. Instead of getting disillusioned because all the NPCs repeat the same 5 lines, you'll instead become disillusioned because they all sound like Claude or ChatGPT.

And worse, even if this doesn't happen, even if it never gets old, that's in some cases worse. Imagine you took this to the ultimate conclusion. Not only do you generate a mountain of dialog options for all your NPCs, you also embed an active LLM prompt window into the game. And let's magically assume that LLMs get good enough to never hallucinate and to always give unique and relevant answers.

Such a game might be legitimately dangerous to the mental health of anyone using it. People already get addicting to immersive games. Take a game as addictive as WoW at its prime. Now fill it with NPCs, each the most engaging conversation partner you've ever had in your life, each with infinite patience and willing to talk with you for as long as you want, at whatever you want, who will never question your ideas or find you at fault for anything. Each as unique as people in the real world are from each other.

That right there is a dangerous machine. That is not something anyone should build. Immersive games are already addictive to many. People are already falling in love with chatbots. Combine them together, and you're going to ruin a lot of innocent lives.

My guess is

1. It would be expensive.
2. It would be hard to control. LLM's are black boxes that often take you to unintended places.

It's a slippery slope. We have to object to ALL AI usage to ensure it doesn't get to that point.

I said metaphorically telling a story. Chess is literally a battlefield, but even physical sports focus on certain categories of human movement and form. They encourage certain body types. They require certain movements. Body language is a form of communication. The shape of your body tells stories of your ancestors and the story of what you've done and how you've treated it. There is poetry in body langue. It can tell a story. There are many kinds of stories. Not all of them are narrative. Some are metaphor. Every sport has its own vibe to it. Every game has its own feel. A video game is the creation of a human being(s). Another human being wants you to share an experience, whether game mechanic or literal plot narrative. Even a game with no plot at all still has heart, still has a soul. It represents another human being's expression of what they believe to be fun, enjoyable, and wondrous.

That is a deeply human form of communication. Even if it is entirely nonverbal. Every game played and loved represents the opening of one human heart unto another. And I find it morally reprehensible to be tricked into having that kind of experience with a machine.

I feel the same for most all creative arts.