Well, any large game world will contain far too much data to be loaded entirely in RAM on a typical computer, and most certainly too much for a console system. Take World of Warcraft, for instance, which has over 12GB of models, textures, sounds, and other data. They have no choice but to break it up into logical chunks that can be loaded on-demand.
So, you're definitely not barking up the wrong tree. Though, you are barking up a very, very tall tree that will be difficult to climb. This is not an easy problem that we're talking about. There is an entire sub-science to resource management.
But there are other ways of reducing your memory requirements that you may not have considered. For example, any object that doesn't need to hold state information will only require one working instance. Models, sounds, and textures fall into this category. The instances of these objects can be referenced rather than copied.
It's also sometimes possible to create a description of everything that's needed in a level or world, and then dynamically create and destroy objects for everything that's visible. Though creating and destroying objects is often very expensive, so it's common practice to "pool" these reusable objects.
Hopefully that gives you a couple ideas. :)
