For me, so-called "realism" is defined purely by the psychological state of the player--how close is it to that of his historical counterpart? This means I tend to classify "design by effect" games in the realistic category just as much (if not more) than games that seek to explicitly model what actually happens. I am probably in the minority here, but that's just how I see it.
Tactical games are the hardest to be "realistic" in that sense, because it's that level that the smell of cordite and blood is the greatest and this is impossible to replicate in games. Not to say I don't enjoy tactical-level games. I do very much. But I don't kid myself--games like J.D. Webster's FIGHTING WINGS and AIRPOWER series--as seductive as they are with all their aircraft stats and cool game procedures--are really built for artificial drama and entertainment than for realism. Planes get shot down in those games. Planes don't get shot down so much in reality. The same goes for the squad-level games; they are basically cartoons. Extremely entertaining cartoons; I love playing ASL/ASLSK, ATS, COMBAT COMMANDER, and the LOCK 'N LOAD "Heroes" games as much as anybody, but I don't kid myself about how representative they are.
For me, the most realistic games start at the "grand-tactical" level and up. Typically games I think are the most realistic are at the operational and strategic levels. For "grand-tactical games, titles such as AH's old TURNING POINT: STALINGRAD was a favorite because both players felt very much like their Sixth Army (German) and 62nd Army (Soviet) counterparts when playing the game. But it was rare to find a grand-tactical game that did this so well. PANZER COMMAND and THE DEVIL'S CAULDRON are some of the rarities. MMP's/The Gamers' Tactical Combat Series comes close for some titles. But I tend to find the best games to be at the operation level when it comes to realism. There are too many titles to list, but I confess a bias for MMP/The Gamers' Operational Combat Series (OCS) and a number of Europa titles, to say nothing of GMT's Eastern Front Series, ROADS TO LENINGRAD, and others. Strategic games also do well, but they typically can't capture the dynamics all that well. First of all, multi-player games are better than those strategic games that aren't. I'd rather play GMT's NAPOLEONIC WARS or even AH's old EMPIRES IN ARMS than AH's WAR AND PEACE for that very reason.
What makes for realism in your games? What games do you consider more realistic?