I didn't find Capra Demon that bad. He was hard and fun for me, but didn't take more than a few tries solo. Hit and run the dogs and get them out of the way near the start of the fight, run away/roll away when he charges up the unblockable, and for the rest just strafe with shield up and try to dodge and punish.
Also just because a challenge beats you up "for the upteenth time" doesn't mean it's poorly designed. It's not the game designers job to make sure you win, it's the game designers job to make sure you
can win. As long as everything is telegraphed well, and the challenges are within human ability (no unreactionable mix ups or anything), than it seems fine to me. I think the more important question is: Is the design of the fight fun to begin with?
Also personally, just being difficult never makes me mad at a game as far as I know. It's like PJ said about when he loses when speed running Super Ghouls and Ghosts "I love the game so much that I'm never mad no matter what happens." If a game is really enjoyable to me, than it's enjoyable even when I'm losing. Same goes for fighting games.
But yeah, it's true that difficulty =/= better. If that were true,
Mushihimesama-Futari on Ultra mode would be the greatest game ever made, hands down.
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Anyway, I personally think that all games should have multiple selectable difficulty levels (in a perfect world, at least).
I remember once hearing an indie developer say he wouldn't put selectable difficulty levels in his games because he wanted everything tailored to "one experience" or something like that. But the problem is that it
won't be tailored to everyone, and everyone won't have that same experience. Like I said in the OP, some people have become deluded into thinking that skill doesn't exist and everything is just trial and error/memorization, and it's just not true. Reflexes, execution, timing, precision, multitasking, awareness, etc. etc. all do improve and become more consistent the more you play and the harder you push yourself. I know people who have completed some of the hardest challenges I've ever faced (and still haven't beat) on their first try. It's just that it's very difficult to gauge how much you've improved since improvement is subtle and takes place over a period of years, and most multiplayer games have a greater emphasis on reading the opponent while single player games get a bad rap for prioritizing trial and error.
So yeah, I think selectable difficulties are the way to go, because what is "normal" or even "hard" for one person may very well be a cakewalk (or eventually become a cakewalk) for someone else. Of course obviously, not all developers have the time and money for finely tuning and balancing such a thing.