PS4 lead architect, Mark Cerny has explained just how install requirements work on the PS4.
Basically if you are playing a disc-based game, the system will begin caching the disc when you put it in the console and get ready to play. So in Knack for example you'll have to wait around 10 seconds to play the game, wit the total install taking up 37GB of space overall.
This cached/installed game data will stay on the hard drive until the user deletes it and while there have been some internal discussions at Sony about having the PS4 auto-delete installed data from games that players hadn't used in a while the hardware giant decided against it, figuring that gamers would prefer to manage space themselves.
The disc installation is required on PS4 because the console is not designed to read games off of discs as it's much faster for the system to access data straight from the HDD. This is similar to the Xbox One which works in the same way.
Cerny also explained that if a PS4 user decides to download a game, they will have to wait longer to play, although how long depends on the user's Internet connection speed. You can queue PS4 to download if you are planning to play them at a later time, so if you're downloading a game then this may be a good idea.
PS4 launches in the U.S this Friday. The European release is November 29.