It's not all or nothing. Why couldn't NPCs have their own lives and have conversations to overhear? Walking around in circles and never talking to anyone else isn't what I would view as an NpC having a life either. Also a lot of DAIs ambient conversations were bad. Take Crossroads - an area everyone would have seen by now. Overhearing "Did you hear the news?"' With no follow up over what the news is... Whatever. Or the battlements in the Dales. Multiple characters had the same lines - about being bored or that demons were coming. This felt like a broken record. There were some, and I mean some, good moments a like finding a few stationary campers who made comments, though this was rare.
The world is not alive at all. What you described is a world frozen in time, a snapshot of how something is at a given moment with no evolution. The changes that are made in some zones are night and day - changing from one frozen world state to another. It's a change, I guess, but in no way alive. It's like someone taking a photo and then returning a year later and taking a photo again.
I didn't say it's not all or nothing, just that the World felt alive to me.
Most games who want to create a living world do one of two things with their NPCs, have them walk around spouting random phrases or have them occupy a single area talking. Since having NPCs march around a small town like they are an animal in a zoo patrolling their cage annoys me and takes me out of the world, I prefer the standing around and chatting.
It is of course possible to do both or just use more NPCs over a larger area like GTA to give the city a feeling of life, but most games do one or the other.
Again a Day & Night cycle doesn't make the world alive. Kirkwall in DA2, felt very much alive and it didn't have a proper Day & Night cycle. The environments of Spira in FFX or the city of Midgar in FFVII felt alive without a day night cycle.
Seeing people and animals live in an world and seeing that environment change based on my actions or the actions of others is what makes a world alive to me.
Seeing the camps of hunters in the Hissing Wastes and the burning wreckage of an area ravaged by war in the Exalted Plains, defending the men Fairbanks has sent on patrol in the Emerald Graves or hearing NPCs conversation change based my actions, all make the world feel alive for me.
It doesn't have to be big game features, little touches, like camps of NPCs telling their stories of how the escaped the Mage Templar War, can really make the world come alive.
And for me DA:I succeed because it used these little touches.