Thanks, Maédhros.
I might also should've included some other thoughts...
The characters are not exactly 'diminished' in The Lord of the Rings. The exaggerated focus on stature and the extremes the characters went to in order to please themselves in The Silmarillion is not there, but they are no greater than the people of the Third Age. As shown by the fall of Beleriand, a cold world like that of the First Age would never (and did not) last long.
What changes did occur include the discovery of self-control, wisdom, and a greater capacity to look at the big picture. The world and characters of the Third Age (and the Second Age too, given the alliances of men and elves) had learned the importance of helping each other out.
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...take counsel with thyself, and remember who and what thou art.
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