You need focus and direction in any media. Books, movies, games, etc.... they all need it.
The first NPC that you encounter with such freedom of interaction is interesting, the 45th will be annoying and you'll just want to get to the point. The holodeck of Star Trek is often brought up as an excellent example of AI generated interactions, but people seem to be forgetting that the stories we see unfold on TV aren't random interactive stories. They're scripted stories written by show's writers.
Unless you want to make a simulation without a real goal, I don't see how this could lead to fun and interesting gameplay past the first hour. Realism is, always will be, a bad gameplay pillar just for the sake of it.