Anyway, we are of course doing neither of those things, but there's a full spectrum of choice that lies in between. We've generally moved away from the second scenario and closer to the first over time (years and years back, respecs were so expensive in relative terms that players often waited for class changes to automatically refund their talents rather than spend the gold to move a point around). Other than the combat restrictions, the live game is not terribly far off from the first scenario.
There's still a fair bit of thought that goes into which talents to select for a raid encounter, where you're in combat for several minutes in a row and facing a variety of threats, and you may have to weigh whether you want better AoE damage for minions in the first phase, or better single-target burst later in the fight; whether you want a passive movement-speed increase for higher overall uptime, or an on-demand active movement ability in case you get targeted by a specific troublesome ability; and so forth.
But most other content, whether it's a single quest boss out in the world, or a dungeon that breaks down to a series of sub-1-minute combats, don't offer nearly that much variety. And so you take the AoE talent for the AoE pack, and the single-target talent for the lone boss, to the point that you might as well just have both of them all the time, which might be powerful, but wouldn't be a choice.