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Graphics may not make the game, but they can aid in the immersive experience. You point out that maybe looking too real would destroy the suspension of disbelief (I paraphrase, obviously). Don’t forget, this could also mean a photorealistic fantastic world, where everything that is normal is turned upside down. It could be a little disturbing if some things look absolutely real. I might stop doing things like getting my money back from, ahem, “ladies of the evening” in GTA for example. But think how awesome racing games and sports games would be with photorealistic graphics. Very, I think.
Where I do agree with you is development costs, and the results of that. What you see already in game development is that companies tend to play it safe with their $100 million dollar development titles.