They are very different experiences. Of course games are fun on the small PSP screen, but the size goes with a different type of experience. Honestly, if you are skeptical of the "games are even fun on the small screen and low def graphics" then you probably out to focus on the PS3, because handhelds (even the Vita) are never going to give you the most blazing tech and immersive experiences. Their screens are always small, the graphics processing always weaker, the memory space always smaller... gaming on handhelds is about easy pick-up-and play anywhere, and you do lose fidelity and sometimes game size in the process.
IMO, the PSP is best for taking PS Classics, the Sega Genesis Mega Collection, and funky Japanese RPGs and puzzlers on the road. If you want more traditional AAA gaming then the PS3 is a better choice
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