This is actually a complicated issue! I sympathize with the original poster's implied position on the subject of color. I prefer, for example, the iconic Alan Lee watercolor look as there is a sort of ancient, remote look there that for me resonates with the ancientness of the stories. Technically, watercolors don't necessarily have to have that desaturated look, but they often do.
But there are many elements of the design in this game and they all have their own issues to address. I feel that for the most part, with few exceptions, the environment of the game, including the NPCs, is ok (the Foundations of Stone in Moria is one glaring exception), and this goes a long way.
Monsters sometimes push the envelope for me. Sometimes they are naturalistic, sometimes not as much. For example, the various colors of orcs seem wrong. To me Tolkien seemed to have envisioned pale and dark orcs, but not so much bluish, greenish, reddish, purplish kinds.
![Big Grin](images/smilies/biggrin.png)
. But they're not quite WoW-colored, so it's borderline for my taste. Where I really hate the coloration is in the fell spirits. Cotton Candy in Fornost just breaks the mood.
As far as dye colors and how players dress, I prefer to have as many dye and cosmetic outfit options as possible even if it means some players offend my taste.
But one of the key points is how to present information to the players because this is a game and to play it effectively you have to be able to recognize and respond to a lot of information quickly, especially in combat. And one proven way to accomplish this is through color coding, and for color coding to be easily effective, it has to stand out somewhat from the environment, which obviously suggests bright, saturated, easily noticed colors. I do feel that in this area the design team has often and especially lately taken the easy way out, compromising somewhat the iconic "classic" Tolkien feeling through the use of bright flashy color elements and "gamey" effects with less effort to seat them into the overall aesthetic. Understandable? Yes, but unavoidable? Certainly not, in my opinion.
It is possible to somewhat mitigate the overall look with how you adjust your graphics settings, particularly the ambient light, brightness, contrast, gamma, and bloom-related settings. I used to run with a dimmer, more muted look but lately have things more vibrant and contrasty. Unfortunately there is no saturation slider; I would love to have that to play with.