Yeah that is my problem with encumbrance. It could be interesting and add another layer of challenging depth to the game if done realistically, forcing you to really consider what you bring with you when leaving base, however in a game like Elder Scrolls you get an encumbrance limit but are still able to carry around multiple full sets of armor, a couple 2h swords, a couple dozen alchemical ingredients, etc. At the point where you are allowing us to carry that much crap around why set some arbitrary limit to it.
I'm fine with weight limits. Inventory tetris isn't at all realistic anyway. You have 2 or 3 weapons close at hand, frequently used gear on your belt and in pockets, and you dump all the other shit in your pack. Weight is usually the limiting factor.
What I fucking hate is when a game lets me sprint effortlessly while carrying 249.9 pounds, then I pick up a feather, that makes 250 pounds, now I can barely walk and the game is yelling YOU ARE CARRYING TOO MUCH WEIGHT!!!
(A) The penalty should fade in gradually,
(B) It should only affect combat, and
(C) Only equipped items should count. You can't fight with 100 pounds on your back. You drop your pack when combat starts.