I'd venture to say that most modern games (be they RPGs, action games, anything above basic card/board games) generally consist of several components: The display engine, the core data structures, and typically a secondary scripting engine. One example which was popular for a time (and may still be; I haven't even spoken to a game developer in years) was Lua.
The decision-making you're talking about (events, conversation branches, etc) is typically handled by the secondary scripting engine, as the scripting languages are more flexible and typically easier to use for the game's designers. Again, most of the real story-driven or game-driving logic will actually happen here, where it can be swapped out and changed relatively easily. (At least, compared to running a full build of all the code!)
The primary game engine combines the data structures related to the world (geometry, etc), the data structures related to the player(s) and other actor(s) needed, and the scripts to drive the encounters, and uses all of that to display the final, integrated environment.
