If the game is entirely turn-based, with each unit getting a turn, or on the contrary, the world is entirely still with the exception of the player, then time passes when the player moves is what makes sense. But that's a specific kind of game.

Otherwise, in an open-world RPG, I expect real-time, but definitely don't want to be rushed or risk missing things. So if relevant have time of day and a day/night cycle and have that affect NPC schedules, maybe monster behavior and maybe some other things it'd make sense to apply to. May even have days of the week, dates, and if you want to go really complex even moon phases or seasons. But that shouldn't make anything missable, so the regular passage of time must be cyclical, if you miss something now, wait a while and it'll happen again. Passage of time in the sense of the state of the world changing should be entirely triggered by the player, upon performing actions that are clear to cause changes, not surprise the player by causing irreversible changes when they don't expect.
About the time compression factor, depends on the game, the size of the areas, how much there is to do. There is such a thing as time going too slowly, but the main thing, again, is to not feel rushed, that I can't do what I want to do in a set amount of time, so err on the side of slower time passage.

Hmmm i rather like Skyrim/Morrowind where an hour (or something) is equal to a day.

Isn't that all games, unless there's a time limit?

Eeeh, not exactly. Most of them don't even bother to model time until the late 16 bit era with any regularity.

Except it can also make sense for first person real time games (real time as opposed to turn-based). I think in Far Cry 3 the time only moves when you are moving; the reason behind this is that for gameplay reasons, most day/night cycles in games tend to be between 24-48 minutes. Once graphics advanced to the point where shadows are rendered reasonably competently, people started to notice that the shadows moved really quickly as a result of sun movements - which breaks the sense of immersion in the game. If the player character is moving, then the sun-related movement of the shadows is disguised by the movement of the player character, preserving the sense of immersion.

Yes i know. Most games are set daytime/nighttime areas, or all just daytime. Or like breath of fire where you use a gem or something to change the cycle.

It depends on how the game is structured. Real-time model tends to work well with games that already play out in real-time like Dragon's Dogma, Elder Scrolls, and Witcher 3.

In Way of the Samurai, the branching plot only spans over the course of 2 days, each with a morning, evening, and night phase. Instead rushing the player with a constant-running timer, time passes whenever a player leaves an area after triggering story events.

For turn-based games, there seems to be more variety in how time is implemented. Expeditions: Conquistador forces the player to rest at camp after traveling a certain distance. Activities on the world map in XCOM2 will advance days, with events that pop periodically, and enemies will grow stronger as time goes on. For Atelier Ayesha, actions can advance time, ranging hours to days, and you are given 3 in-game years before it ends.

Breath of fire was just like Dragon Quest 3, except that the day/night cycle did not appear to do anything in BoF.

I think the honest answer is "whatever best highlights the entailed experience the game wants to give." Majora's mask used an accelerated clock to create a puzzle of time in ordering the completion of events and exploration. Time based on movement(such as Pathfinder:Kingmaker) was to create a time limited theater sections between detailed adventures. Time passing on rest is centered on accomplishing tasks within limited resources and planning around the capabilities of the player.

They're all valuable, pending on how it's used. A accelerated real time clock doesn't work for Fire Emblem,and IMO, it didn't work for Poke'mon. None of them are "betteR" or "worse"

Pokemon, at least Gold, Silver, and Crystal, actually used real time, running even when the game is off. The problem with this is that it threatens to make the game interfere with daily life, resulting in the player rearranging their schedule for the game, rather than the other way around, and that can lead to some questions.

There are some other games that do this. Fell Seal's expansion has missions that take a certain amount of real time, for example. And then I've heard that The Longing also does something like this: After 400 days (that's over a year), the game will end even if you do nothing (though there are apparently ways to speed up or slow down time).

That standard tends to cause that feeling of being rushed though, at least if the passage of time has any relevance other than graphics changing.
But anyway, if time doesn't pass unless the player moves, how's it real time?

Because it's not turn based.

I'm using the commonly accepted definitions of real time and turn based in the context of video games. The game itself is real time - even when time isn't moving, the NPCs are (and the PC can still turn and shoot). Think of time as you commonly perceive it - the "movement" of the sun across the sky as a mere decorative effect in the world.