Don't be so quick to discard realism in a game. The keyword here is escapism. People want to escape to a different world. The thing here is that this isn't supposed to be the perfect world, or a world full of sunshine, but a world in which the player can mean something, can do something to set him apart, in a manner of his own interest. For a financial genius who only cares about calculus and money, escapism wouldn't really be necessary 'cause he'd be living his dream. But for people who have a romantic view of the middle ages, the perfect setting would be a romanticized view of the middle ages. That doesn't mean people have to wear the same kind of underwear as they did in the middle ages, or crap out of their windows like in the middle ages... That kind of realism isn't necessary. The point is it has to be romanticized, so it can perhaps be more civilized than the real middle ages... but you can't have anachronies going on... some things can be explained by a different world in which other rules apply... but suspension of disbelief only goes so far.
What I like is low-fantasy. That means a medieval European world, slightly romanticized, but without magic like mages use, no magical projectiles or mental spells, but yes to dual-wielding and elves and stuff... That doesn't mean I refuse to play a game with magic... but it does mean that the less I have to experience magic, the more I enjoy the same game. Like Gothic II for example... hardly anyone is ever seen using magic, so i don't mind that I can use magic... I just don't and it's credible.
Which means I don't have to make the game less fun for mages, cause i don't hate the PC using magic... but as long as I don't have to see it if I don't want to, my disbelief is suspended. It's all about preference.
Personally I love gritty and gray, with some bright areas. I would hate the whole game to be too bright, such as for example Fable. Your preference may be different. That's why we have graphic settings. It's a very minor problem. Content issues, though, are much harder to achieve compromise upon.
