@Batlin: I think the thing you’re kind of missing (that a couple of people have mentioned) is that most people who we would consider evil don’t actually consider themselves evil. There’s actually very few people who actually conceive of themselves as bad.
Your basic narrative that being bad is easy and profitable, and being good is hard, just isn’t that relevant because the “bad” you’re talking about is basically petty criminality. It’s not “evil”, it’s selfishness.
Given that, the question then changes from one of “good” or “bad” choices being represented realistically, but one of differing moral systems being represented realistically. For example, you can imagine a game allowing your character to behave in a kind of left-wing way (emphasis on collective responsibility, progressive social values, diplomatic foreign policy), or a kind of right-wing way (emphasis on personal responsibility, traditional cultural values, aggressive foreign policy).
In that case, the game would have to give relatively realistic and balanced outcomes for both outlooks, or risk coming across as partisan.
I agree with you that games too often present “evil” choices as cartoonishly villainous, and then also smack them with gameplay penalties, as if the player needs to be reminded that CRIME DOESN’T PAY.
I actually think that Baldur’s Gate 2 did a pretty good job with the evil stuff (my comments above about “evil” being a problematic term held aside). In it, being evil gave you access to some of the more powerful gear (if you kill the silver dragon in the underdark and steal the human skin from the flayer you can make one of the best suits of leather armour from it), and by far the most powerful party members (Korgan, Viconia and Edwin were easily best of their class).
Some aspects of it were very clumsy, like the blanket reputation decrease that meant everyone in the world knew to hate you just a little more if you did something bad in some deserted dungeon. But overall it had some nice ideas.