Apparently this feature should allow better video and photo quality when shooting in areas there is not enough light, so called low-light areas. Not only that I had not noticed a better quality with this option is set on, but I also noticed that videos taken by night look even worse.
I was quite confused about this feature so I emailed Xiaomi and asked what this option does and when it should be turned on. Here is what they said :
The auto low light in settings is a feature wherein if there is low light in the area where you are taking a picture or shooting a video, you can switch the auto low light feature in the Yi camera and it would still be able to capture a nice picture or video.
From what I understood this option should be turned off unless you are in low light situation. I personally keep it always off. Until they improve it via firmware upgrades, I do not want to risk sharpness of my video.