LOGIC IN GAMES - WHERE DO YOU DRAW THE LINE?

I don't think it's a question of drawing the line somewhere. Realism should be used to make your game better, not to shackle you. So, rather, I think it's the question of recognizing when realism adds to the game and when it only adds to your workload.

Often, going halfway is the better idea. For example, treasure chests are rather boring by now, so if you can replace them with something more native to the place you're visiting, that's better. So, you can have ores in a mine and herbs in greenery kind of places. You can give the player equipment by placing corpses of perished adventurers.

However, you would not really just find ores in a mine. Anything that hangs on the wall would have been taken already. You'd have to dig first. The adventurer would also not only have that magical sword, even if he couldn't afford magical armor to go along with his sword, he would at least get a set of non magical armor. If at any point you see that going further along with realism no longer improves the game, then stop.