It depends, if you only focus on graphics, it will be less fun. What you need is a balance. Some games are so fun even with bad graphics. For example packman or Mario. Also like Minecraft, if you put shaders, it will get a bit boring even the game you are playing is same.  (If you are talking about real life graphics )

In simulations, you need to make sure the same scene isn't loading 100 times. There must be something even a little bit unique element. In real life simulations, may be you can change the environment a bit, or lighting or even the weather. That creates a big difference. (If you are talking about real life realism)

It depends.

Generally, trying to make something realistic—just for the sake of realism—is a bad idea, because it often ends up being boring or uninteresting.

It is a different story when you have a clear objective for your game and realism is part of that ultimate goal.

For instance, if you are creating an Apollo Guidance Computer simulator, the people playing it will likely be looking for realism (though, admittedly, I doubt it would be a very popular game).

Another example would be a pinball simulator; again, players of that genre look for a simulation that faithfully replicates a real table.

On the other hand, there are pinball games that completely disregard real-world physics yet are still very fun.

So, whether or not to aim for realism depends on your game's objective. If adding realism conflicts with your goal or fails to add anything of interest for your players, it is better to leave it out; conversely, if it will make your game more entertaining, then you should certainly include it.

I favor creating games that are fun or build a significant experience rather than creating something realistic.

I prefer to sacrifice realism to gain freedom and fun.

Though as for your question, it really depends on definition of fun. If fun could be achieved by realistic mechanics, then why not apply realism there?

I think this is a question of balance between suspension of disbelief and rule of cool. With a bit of necessary game play and mechanics mixed in.

If an added realism advances the story, enhances the experience it might be good. If it distracts from the core game, or raises consistency problems, that's less good.

Like, if this thing in the game world is so and so, why is this other similar thing in the game world handled so differently. Or, if there is night and day, but it has no consequences, why add it. For realism, or just for fluff. Or is it actually a game mechanic in disguise.

If certain aspects of realism are the core of a game, bringing in other realistic things - just because they are realistic - begs the question where to stop. Will you make the player have the avatar breathe in and out and go on toilet breaks next? There is a thing called feature creep. And I believe it can apply to realism in games.

I played a game called Potion Craft: Alchemist Simulator. It had you physically move your controller in ways to simulate the actions of the devices. Like handling mortar and pestle. Stirring a kettle. That's ... interesting about once or twice for the novelty. After that it's just not fun.

Can making a game too realistic actually make it less fun?

Yes. Not only less fun. It can make a game unplayable. A game is per definition an escape from reality. Bringing too much reality into the game will defeat the purpose at some point.

Where that point is, is different for each player and depends a lot on the genre. A stamp collector simulator game will have different expectations than a business tycoon simulator. But if you introduce the need to go to the toilet in the game as an added realism, both target audiences might give you a confuse look.

If on the other hand you have a game where a mechanic is, that your hero will replenish mana by drinking lots of wine, adding intoxication and the occasional toilet break will be a nod to that mechanic. But most people would probably also accept the suspension of disbelief, that heros do such things offscreen. If the intoxication or the toilet break has negative consequences and there are different means to refill mana, it would add a new complexity to that mechanic. If that is what you want to add, is another question. But if you do not add these things, why bother to call the mana replenisher a wine bottle in the first place. It could be little blue gems floating in the air.