So I installed half a dozen of her games, such as the excellent rogue-like Don't Starve, that I don't own, and she did the same. She installed Civ 5 off my account and started playing it, curious to see what would happen, I booted up a game and she got a pretty polite notification giving her a couple of minutes to finish what she was doing as I needed my games. It seems that sharing is as considerate and well thought out as we have come to expect from Valve.
She went back to playing Terraria off her account, so curious I looked at her games and found that the play button, had been replace with a buy button and a notice stating couldn't play this game at the moment, and would I like to buy it. Yep I was apparently just a couple of clicks away from picking up a copy of the game myself. Valve get a lot of love from the games community, but never forget they are a bunch of very shrewd business people.
So all in all it does pretty much what we expected, so I can play one of her games whilst she watches TV and she can play one of my games when I am on the PS3 (I am always playing something). The games function pretty much the same way as they would if they were yours, down to your own saves and options, just that if the owner starts playing any game, you have to stop. Seems particularly great if you only have one computer and multiple users, as each person can keep their own games, but have access to a bigger library overall. More clever, and lets be honest, quite cunning stuff, from Valve.