To my understanding, the higher you set it the less slip it gives, If one wheel looses traction it should back the power off that wheel and send it to the other that has grip?
In theroy, set it as low as possible untill you need it to kick in, but also remember you are playing a computer game that is suitable for children so dont expect everything to be as they should.
Take a real car if you have one, put one wheel (drive wheel) on some grass with the opposing wheel on tarmac, rev the danglers off it and drop the clutch... The wheel on the grass spins and the one on the tarmac sits there doing nothing.
An LSD should drop the power off the wheel without traction and send it to the wheel thats sat there twidling its thumbs
I think :|