When the material is heated up inside the nozzle chamber, it will take away heat from the nozzle. Extruding material faster tends to take away more heat from the nozzle. If the temperature probe is not exactly at the tip of the nozzle, that will cause the nozzle to have a slightly lower temperature while extruding material than when idle. This setting describes how soon the heat is lost in the nozzle while printing.
If Auto Temperature is enabled, the printing temperature will be adjusted depending on how soon the heat is lost. The extra heat lost by extruding will then be compensated for by increasing the desired printing temperature from the G-code.
The setting's value depends on the nozzle design, the heat capacity of the printed material and the extrusion rate.