Gabe wanted to know the nature of the feedback that resulted in the change to Explorer navigation pane.
Historically, Explorer had a navigation pane that contained a folder tree, and the navigation pane could be toggled on and off. From observations and usability studies, we observed that users in general found this toggling burdensome. People liked the folder tree as a form of browsing, but they didn't like the fact that the folder tree kept changing as they navigated through the system. In other words, they liked the fact that they could change the folder tree by expanding and collapsing nodes, but they wanted to be in control of the expansion. They didn't want the folder tree changing autonomously. The instability of the navigation pane came up repeatedly as a complaint. (A conclusion you can draw from these results is that most users do not use the folder tree to determine their current location; they use the address bar.)
It's the same attitude I have toward a previous version of the GPS-enabled mapping system I had on my laptop. When the GPS is plugged in and working, the map centers on my current location. I can manipulate the map, zooming out for a better overview of the area, scrolling around to see what's nearby, but every three seconds, the mapping software automatically recenters the map on my current position. And then I shake my fist at the computer. (The newer version lets me disable automatic recentering.)
Based on the feedback collected by usability research, the navigation pane in Windows 7 by default does not auto-synchronize the folder tree with your current location. Nodes expand and collapse only under your explicit command. Users who preferred the old model where the folder tree always synchronized with your current position (and who were okay with all the movement and jumping around) could return to the old behavior with a configuration switch.
There was a lot of experimentation regarding where to put the configuration switch. Putting the switch as a top-level command was too in-your-face; setting it as a right-click option was convenient enough. And studies showed that users rarely keep switching back and forth between the two styles. They just set it and forget it.
After Windows 7 was released, a follow-up usability study returned positive results and confirmed the value of the new design.
Note: I am not the one who conducted this research. I'm just reporting on it, since you wanted to know, and I knew whom to ask.