Why isn't my iPhone automatically adjusting its brightness? On my iPhone 4S (iOS 5), I've set Auto-Brightness to on (in Settings -> Brightness).

I haven't, however, seen it do anything. As far as I can tell, my brightness has never changed automatically. The screen is equally bright when I'm outside on a sunny day, or inside reading in a dark room.

Am I misunderstanding what this option does? Otherwise, am I doing something wrong that's preventing it from working, or is this just a bug?

My brightness slider is set all the way to the right; Auto-Brightness is set to On.
Try turning your iPhone's brightness slider to the middle or slightly lower, but leave auto-brightness on.  The phone will usually auto-adjust its brightness after it gets locked (display turned off) and then turned on, maybe a minute or so later, in different lighting conditions.