1 exactly

depends on game type, most games have colours that suit wot kind of game it is.

After watching Blizzard defend the art direction of Diablo becoming more colorful, and playing Dragon Age (which has a very "bland" color palate"), I can honestly say that color is not just an artistic feature it is also necessary for gameplay (in many cases). When a game decides to be "gritty" to the extent that the typical person can't tell what is happening on screen it is a very poor decision by the designers and critics (and gamers) should be hard on the developers for that. At the same time, playing through the same brown environments for hours on end can get very boring, and if developers choose to be "gritty" the the extent that they eliminate variation from a game it is a very poor decision by the developer.

With that said, developers also have to be careful not to make games so colorful that it acts as a distraction. If your art direction goes from "Gears of War" at one minute to "Super Mario Galaxy" the next the continuity of the art direction is not being maintained very well.

a good example would be fable 2 vs fallout 3

fable is a colourful fantasy world, where as fallout is a nuked out wasteland, if you were to swap the colours, each game would look odd to say the least.

I came in here expecting this to be about "Colors" vs "Colours".....

I still side with Colors.

As long as it is consistent I don't see a problem with that; after all Borderlands was a wasteland and was colorful and there have been lots of "brown" fantasy RPGs ... The goal should be to include variety within your artistic style. In a game like Fallout 3 some of the interior environments could be very colorful ruins (as an example).