When I say "realism" I mean that the setting conforms to known generalisations of tendency for human societies. To give one instance of what I mean by this: in a mediaeval-type setting the folk culture will be predominantly oral rather than literate. (Just the other day something - I can't remember what - prompted me to think that I should include a performance in a town scene soon.)When I say realism, I mean something that is not railroading (the DM creating unrealistic obstacles to keep us on track) and that aspects of the world are not modified based on what the DM thinks will cause more drama. I mean combats are not structured for balance as in combat-as-sport games.
In my FRPGing, realism is a consideration for establishing fiction, but not the only factor by any means. Partly because there are (significant) limits to my knowledge; partly because expectations for FRPGing are set by other fiction as well as history, and that other fiction is often not realistic; partly because some unrealistic things are nevertheless interesting and fun.
I wouldn't use "realism" to talk about game play processes. Realism seems to me to be an attribute of a fiction, not an attribute of a process whereby a group establishes a fiction that they will all imagine together.