"Fantastic" or "fantastical" - not necessarily in the narrow sense of "fantasy-esque", but in the wider sense of "improbable, unrealistic".
The first Matrix was a perfect world, but not realistic because it had no downsides and didn't cause suffering. It was assumed by Smith, and I *think* not disproved by the Architect or anyone else (thus making the theory remain valid), that people rejected it due to exactly this.
They couldn't accept a perfect reality, because they defined reality through downsides (to a part, at least).
The second version was, in the very sense, "fantastical". Based on human fantasy, and containing lots of supernatural creatures and monsters. That's where all the exotic Exiles are from.
I think the Seraphim are from the second version? I've thought for some time they were from the first one, but that was probably wrong.
People couldn't accept it because it was so fantastical, and they started questioning this scenario. (Also due to fear, but I haven't quite got that part.)
Realistic and real isn't the same. Real is real. Realistic is "close to real", "true to reality", "like the reality". We accept a photo because it's realistic and looks like real - not because it's real.
A realistic Matrix is pretty much what the current version is. Not that there weren't weird stuff bluepills run across, but it's based on the modern world, with good and bad sides, and without anything "fantastical" people wouldn't believe in their everyday life.
So, with all the knowledge base he has access to, and (I think?) the logical thinking he is capable of - he first comes to the conclusion that a perfect world would be a solution. Then, he comes to the solution that a fantasy world would be the solution.
The core point is, I can't imagine how he couldn't think of basing the Matrix on known information about the world prior to the Machine age, and thus constructing a *realistic* world. The current Matrix.
I already don't understand why this wasn't his first solution, but even after two failures?
What I'm proceeding from is that the first two Matrices failed due to the scenarios. Not how people would accept reality, rebel, failure.
If this was the cause for the failures, or the Architect saw it as such (considering he changed the scenario for the second one), the next best solution would be just constructing a new scenario, which I'd suggest to be the current one.
Now, the only possible explanation I see to why he didn't first try this would be that either he had realized this wasn't the only or even the main cause, or the Oracle had seen it was primarily due to the humans not being offered a "choice".
Then, he wouldn't bother to first just try the new reality-based scenario, but also worked in the new concept.
However, I don't think this was implied in the movies, and I also don't think you touched it.
PS: As long as the complexity of your answers doesn't really exceed the required level, I don't have a problem with it.