Realism in games has increased drastically over the years. Graphics have improved, voice acting has improved, story writing, character design, level design and basic physics and mechanics have all improved as well. All of these improvements have made games as an experience seem more real. Some games have gone even further and tried to assimilate some degree of total realism, though they are usually too punishing to become accepted by the mainstream.
Whilst I don't think games should be totally realistic - being wounded or killed as easily as you are in real life in a game would just be annoying - I do think that games need to try and be a little more real. For instance, when your supposedly good guy character guns down a room full of people that he's never met and just shrugs it off as no big deal that doesn't impact on him in any way, well, that can be a little bit jarring. Some sense of morality would be a welcome addition.
As well as this it would be better if the stories, especially in modern war FPS games, were a little more real. Modern Warfare's over the top World War Three scenario can be fun but it could be so much more. If the stories were more believable and/or more emotional then shooters such as Call of Duty could be far more popular than they are today because people could relate to them in an entirely new way. Games like Homefront made significant steps towards this in an emotional sense and it would be great to see more games try and do the same.
Interactivity is also something that needs to be improved. Too many games feature whole cities made of buildings you can't go inside, bushes and grass don't always react when you run through them, items around the world don't break if you knock them off of a table or shoot them. Tiny things like this are reminders that you are playing a game and they can often break up the experience.
There are countless other things that could be improved but to list them all would take weeks. I accept that things like this are limited by time and development budgets as well as technology but as technology improves so too should the games.