Dundee has a pretty good summation of how death penalties are getting lighter with time, and why.  (Damion notes: this link is now dead).

Thought I’d throw out one additional thought: Your death penalties create the grind.

MMO players are notorious optimizers. They will find the steadiest stream of income, be it exp or gold. They will figure out how to do this with the least slow-down possible. When a death penalty is harsh, it makes players take fewer risks. Fewer risks means players are killing things at or below their level, because the costs of death aren’t worth it. Remember: there are no quicksaves in an MMO.

So what happens? Simple: players bore themselves to death. They only take fights they can win, because winning a bigger fight isn’t worth the risk – even if the risk is nothing more than fetching the corpse. They will also shrink their own game experience. Wandering far from home, fighting monsters you’ve never fought before, also means risk. So they will kill 8000 lizardmen in a row, ignoring a whole world full of content, and then complain that the game lacks variety.

We need to figure out how to get players to be willing and happy to take more risks, because risky play is what gets the adrenaline going, and is by extension more interesting and engaging gameplay. This means that designers will continue to monkey with death mechanisms far in the future.